Rental Property Investor · Philadelphia · Member since 2020 · 16 posts · 18 votes
I'm a fairly new investor, completed my first BRRR a year ago. My real estate business is under a LLC. I recently accepted a $10,000 business credit card with BOA and they are now offering a business loan for a vehicle (2.49% interest vehicle under $50k) I'm not in the market for purchasing a new car. I have under 2 years left on my car note which is under my personal credit file. I am however considering the offer because the loan would not be connected to my personal credit file. I’m shopping for another BRRR property so to have one less account on my credit would help. My concerns: are business vehicles more expensive to insure? Are there Tax liabilities or incentives? Is it too soon or even worth it?
The major tax benefit as mentioned is 100% bonus depreciation. For this to matter in the current year, you have to have income to absorb it. Also remember when you sell the truck you will have to “recapture” that depreciation (pay taxes on the proceeds minus the basis which will be Zero if you take full bonus depreciation).
As an MLO, I can tell you there is nothing that disqualifies someone for a conforming loan more than a truck payment. The single most thing that separates home owners from non-homeowners is if they bought a car they couldn’t really afford before buying a house. Proceed with caution and know how lenders will see this. If you’re using income for your business to qualify for loans, this will hurt your borrowing power in some way. Fannie and Freddie underwriters often have a hard time understanding bonus depreciation and may see your income as weak if offset a bunch of income by in essence expensing the truck.
@Shince J. leasing works too. It just depends what works better for YOU.
Everyone has to see what will work better for a c-corp or s-corp or llc or whatever situation that they are in. I know what works best for me. It might not work for you or what you are trying to accomplish with your tax strategy.
@Rick Pozos A pickup truck has to have at least a 6’ bed for the full deduction, otherwise the deduction is limited to &11k and something. Most of the popular quad cabs have a 5.5’ bed.
Business insurance for an auto is reasonable, commercial auto insurance is much more expensive since autos are typically used more and harder. What is the busines?
Hi Pat, like your post. what’s your thought on leasing versus buying vehicle under business? Why not lease and deduct the lease while taxing rather than fiddling with the sensitive subject “Depreciation” ?
Our youngest REI daughter 179'd her 2013 p/u Truck & just traded it in for a 2020. Our eldest SE daughter leases & deducts it using a % for business breakdown & has done so for 5 years. All my p/u trucks were 100% business & were 100% 179'd but I had the SE income to deduct against. I do too many miles (20k/yr) & beat the vehicle too much to lease.
My wife is now leasing 'whatever she wants' & deducts a % for business, but she barely uses the 10,000 miles/36 months. The leasing vs buying accounting is just a personal/convenient choice for us, so as leasing costs go up we just do another deal to cover the lease payments.
@James G. For lease payments, there’s an inclusion amount you have to calculate. It’s complex to explain, but has to do with the Fair Market Value vs the lease payments. The IRS provides a table for calculating it. The tax benefits of leasing were about the same as buying, prior to bonus depreciation changes. You can’t take bonus on a leased vehicle, unless you purchase it at some point.
From a lending standpoint, leases leave less flexibility. If you have a lease payment, it will go against your DTI no matter what. If it's a payment on an amortized loan, it doesn't count against your DTI if there are (I think) less than 10 payments, per conforming guidelines. If you have a big lease payment or a big car payment that is messing up your financing plans, getting rid of the payment is much easier. Selling or paying off, or lowering it via pay down and recasting or refinancing. You have options. With a lease it is much more difficult.
If you change the ownership of the vehicle to the LLC you may have to purchase a Business Auto policy to cover that vehicle. Generally, that coverage is more expensive. If the vehicle is a private passenger (sedan, coupe, etc.) it is even higher under the business auto rates.
If you are the only one driving it for business (no employees) and you are using it for back and forth to the Job Site/Property, there are some Personal Auto policies that will allow for that business use. You also need one that will allow for the LLC. If you have a second vehicle that will be in your name, you will lose the Multi car credit if your have to get a separate policy for the LLC vehicle. That could increase your cost on the non LLC vehicle by 20%.