Tax advice please

6 Replies

Background. I'm 23, work in the oilfield. I work rotationaly. 2 weeks on 1 week off. Making about 140k. Primary residence is currently where I rent in nd, I head back home out of state on days off. I recently bought my first property which I renovated and could gross about 27k on. I'm wondering if I should change residency back to home state or will it not matter because I thought you could write off up to 50k on a second home? Also I may just decide to keep the house and heloc to acquire more properties, does it have to be primary house for an interest write off? 

Thanks in advance 

First, you really want to find an accountant who's experienced with real estate.  This is complex stuff.

Is the house you just bought for your own use, a rental or a fix and flip?  Own use it would be a second home and the same deductions apply as  for your primary.  Mostly that's mortgage interest.  For a rental or fix and flip you'll pay taxes on it in the state where its located, regardless of where you live.

Jon Holdman, Flying Phoenix LLC

to be honest I bought it without an exit strategy. It was a good deal and I thought I'd sell initially but right now I'm leaning towards personal use and just keeping it to borrow against. The option that's not really on the table is a rental. I guess what I'm saying is if I can make 25k tax free that would be on the table. But if say it comes in at 20k and then I have to pay taxes on that I'd rather just keep it. Thanks 

Originally posted by @Travis Bill:

Background. I'm 23, work in the oilfield. I work rotationaly. 2 weeks on 1 week off. Making about 140k. Primary residence is currently where I rent in nd, I head back home out of state on days off. I recently bought my first property which I renovated and could gross about 27k on. I'm wondering if I should change residency back to home state or will it not matter because I thought you could write off up to 50k on a second home? Also I may just decide to keep the house and heloc to acquire more properties, does it have to be primary house for an interest write off? 

Thanks in advance 

It can still be your primary residence; it must be so for at least 2 years of the last 5.  The primary residence does get a write off o mortgage interest. As does a second home.
For investment property you can deduct the interest on the respective form or Schedule A.  Feel free to ask if you have specific questions as well.

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

Steven, if I understand correctly you are saying that I should receive the same tax benefits keeping it as a second home, even the mortgage interest, so I don't need to bother changing residency and whatnot. That's great I was a little worried and wasn't too sure. Thank you. 

@Travis Bill  

Steven is suggesting that you want to make the home you plan to sell your primary residence.  You can only have one primary residence; the other is your second home.  If you have owned and occupied a property as your primary residence at least two of the five years prior to sale, then you can take advantage of the capital gains exclusion.

Don't discount rental property use.  There is a way to sell a rental property then replace it with another within 180 days and defer the capital gain indefinitely.  This is a 1031 exchange.    

You can deduct mortgage interest on both a primary and secondary home.

When you sell a house you normally owe taxes on the gains on the sale.  At the simplest, that what you sell it for minus you purchase price minus your selling closing costs minus your purchase closing costs.  It gets more complicated quickly.  If its is your primary residence and you have lived in it for two of the five years immediately prior to the sale you can exclude gains up to $250K.  This may be what you're thinking of.  If you make this now house your primary and you live there for two years then sell, you could apply that exclusion.  But not if you sell sooner, even if you do make it your primary.  

The tax rate depends on WHY you bought it.  If it was purchased as a rental (that is, you intended to hold it) its an investment and you'll be subject to capital gains taxes.  That has two different rates, depending on how long you've held it.  Under a year its taxed at the same rate as ordinary income.  Over a year and its taxed at a lower rate, currently 15%.  OTOH if you bought it intending to sell, such as a fix and flip, the income is treated as ordinary income.  So, taxed at your ordinary rate plus you owe self employment tax.  Self employment tax or SET is social security plus medicare.  But since you're self employed you have to pay both the half that's normally deducted from your paycheck plus the half your employer normally pays.  However, given your current ordinary income, you will have maxed out the social security part so its only medicare, about 3% for both halves.

Jon Holdman, Flying Phoenix LLC