All Forum Posts by: Phillip Weickert

@Joe Splitrock  The IRS would not know unless they audited you.  If they even look at that category of the audit.  

The terminology for this is called the tracing rules. The mortgage interest is suppose to follow what the money is used for. Now this can drastically depend on what type of entity you are. if you are a single member LLC or own the properties out right the tracing rules apply. If you spend your money on a car (personal) or a vacation or something personal it would be personal interest and non deductible. If you spend it on paying off student loans then it would be a student loan interest. If it was for investments then it would be investment interest. If you are in a partnership with partners then this calculation can become a bit more complex. It could be 100% deductible at the partnership level or it could follow the partner and it would have to be determined if its deductible or not at the partner level.

Yes the Mortgage lenders will advocate that, but they don't know the tax laws.  Now if they say it is deductible (general sense), they probably arent to far off, but it depends on the type of destructibility (Sch A, Sch E, Home office, etc).  However the mortgage interest is suppose to follow where the loan is intended for.  A lot of times this only matters on cash out refi (pulling cash to use somewhere else ) because your intending to use the money somewhere.  

Now everyone's situation is different and in many cases the details are a must.  So please contact your cpa or tax preparer with direct questions.  However a high level scenario is to follow the tracing rules.

@Erin K. That is correct on your example.  If you use 50% towards personal then it becomes an itemized Deduction, however if you use that 50% towards rental property (improvements, buy another, etc), then the mortgage interest would be deductible on Schedule E.  The money spent on the rental "could potentially" be deductible or capitalized depending on the improvement.

Erin - If I understand you want to cash out the refinance on the rentals to pay for your new home.  The interest that you pay (mortgage on the rentals) would be deductible?   

The interest follows where your money is used from the cash out.  Therefore the money that you pulled out of the rentals and put towards the personal residence would be an itemized deduction.  You should bifurcate the total interest of the cash out and put some towards the rentals and the appropriate amount towards your personal residence. 

I know you mentioned you don't itemize on your tax return.  However standard deduction is a set limit for a single taxpayer or married filed jointly.  Your personal exemption will change based upon how many people you claim on your tax return (you, husband and kids).  If you think you might not be able to itemize on your return there are some other ways you could benefit from that interest.  You said you were a self employed individual.  You might be able to claim some of that with a home office.  

You will want to discuss all the details with your CPA/tax preparer.  If you would like to talk or discuss some more planning options, please feel free to reach out.  I am a CPA located in Ohio and can help. 

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Ben – Welcome to Cincinnati! I hope everything is going well for you. Here are some of the answers/comments to your questions:

• -As a sole proprietor or a single member LLC you will file your rentals on Schedule E of the Form 1040. At the top of the form there is room for the address, what type of rental property and then how many days it was rented (available for rent). Then at the bottom of the form is where all the income and expenses are reported. This form will be an addition to your normal federal filing 1040.
• -Within reason, you will be able to claim everything that was spent related to the business. So if you bought door handles, drywall, etc that can be expensed. However there are certain expenses that are not allowed to be deducted or will have to be capitalized.
• -The only time you can expense or depreciate items is when the rental is available for rent. If you purchased it in December 2016 and it was not available for rent in 2016, then you will not be able to claim any deductions in 2016. However these items will carry forward and you will be able to depreciate them in 2017 or once the property is available for rent.
• -In regards to driving anywhere for your rental (to home depot), you can deduct those expenses. There are two methodologies where you can deduct from. I would recommend 1 of the 2 due to simplicity. This methodology is the mileage rate. If you keep track of your mileage driven for the rental then multiply that by the business mileage rate (2016 0.545 cents per mile) to get your total automobile expense related to the rental. The other way is to keep track of all your expenses and potentially prorate everything based upon a percentage to the rental.
• -If you moved out to Cincinnati for a new job (real estate), then on page 1 of the 1040 there is a moving expense deduction line. There are many different things that can be included in that line, but one item which involves the miles driven is multiplied by the moving mileage rate. (this sounds like it will be a 2017 deduction)

It sounds like most of your deduction will not be able to be taken in 2016, but they will be able to be taken in 2017. All of this information I provided above is solely based upon a high level approach, please do not rely on this 100%. I would advise you talk to your accountant to make sure all of the information for your situation is correct.

However I do not see any issues with using turbo tax, but you are starting to get into some gray areas of the tax code, where having a professional might be worth the investment. If you are looking for someone, I am a CPA and work for a local firm in Cincinnati. I do have a few properties myself and have helped many other real estate investors. Please feel free to PM me if you would like to discuss more details.

Phil Weickert

Hey guys! I hope you all are doing well.  I am glad I was able to read this post.  It has been very insightful.  

I am an investor in Cincinnati and own 7 SFR down here and plan to grow as rapid as possible. That being said I recently got a SFR under contract in Toledo and will close on July 8th with my Partner.

The reason I invested in Toledo is due to my home town is near Toledo (Fremont).  In the next 5 years I plan to move back up that way and wanted to get a head start on the rental business up there.  

I am curious is there a bigger pockets meetup in Toledo?  Have any of you attended before if so?