All Forum Posts by: Jenny Bayless

Hi @Ben Clark

The costs incurred in rehabbing your property prior to putting it in service must be capitalized. After the property is put into service (available for rent), then you may analyze each cost to determine whether it needs to be capitalized or if it may be deducted. Let me know if you have any questions.

Hi @Michael Bertsch

It would be what you purchased it for (less land) plus improvements performed as part of the rehab prior to putting the property in service.

Thanks for your response @Travis Sperr!  How long do conventional lenders typically require for a rate and term refi?  

We are planning to use a HML to fund the initial purchase of a property. We will then rehab, rent, and refinance. However, I have a question on the refinance part.

Does anyone know of any banks (either portfolio lenders or conventional mortgages) that will allow for a re-fi less than 12 months (or even less than 6 months) in Colorado?  Basically I would like to perform the rehab, get renters in and then immediately refinance based on an appraisal.  Is this even possible, even for a portfolio lender?  I know conventional typically require 6-12 months.

This will be property #6 in my name alone, but I am able to qualify for Fannie/Freddie loans. If I do private/portfolio, I am just looking for the rate to be reasonable (not HML-type rate).

I know that we aren't allowed to give out referrals in the forum, so please send me a PM if you know of anyone who might be a good fit for what I am looking for.

Thanks

Jenny

Hi @Nick E.

Please find my answers to your questions below:

1. Sort of- the mileage would be considered start up costs as you mentioned, since the asset has not been put into service.  However, this would all be added as part of the cost basis to your property.  If you incurred say, $100 in mileage costs, you would then add $100 to the cost basis of your property purchased (less land as you mentioned below).  Then you would depreciate the cost basis over 27.5 years.

2. Regarding the meals, if you were driving in town (not on travel), and just eating out while looking it properties, the answer would be as you stated: no.  Was there a business related purpose to the meals? If so, these are start up costs and there are limitations to these as well.

3.  The IRS does not require a specific method of determining land costs when calculating depreciation of an asset, but once a method is selected, and you wish to change, you would need to file the change with the IRS.  You can use either method you stated in your question, both are acceptable methods to use- you will just want to make sure to keep records of the method chosen as supporting documentation.

Please let me know if you have any questions.

Hi @Raman Bindlish

That's correct- the only tax implications you will have related to the cash out refi would be you'll likely have a larger interest expense, and you will need to amortize your loan costs over the life of the loan.  

Just remember that you are not earning the money you are taking out as part of a refinance, rather you are just borrowing it, and you will still owe this back to the bank as part of your mortgage (you are just paying it back incrementally via your mortgage payments).

Think of it this way for example: You have a house worth $100,000 and a mortgage worth $50,000.  All else equal, your equity is $50,000 (assets minus liabilities).  Now, if you in turn do a cash out refi for an $80,000 loan and pull $30,000 cash out, you now have $100,000 house (asset), $30,000 in cash (asset), $80,000 in mortgage debt (liability), and a net worth of $50,000.  It was nothing but a shift amongst assets and liabilities.  

Hi @Raman Bindlish

It is important to note you have three separate things going on here: A. An adjustment to your basis of the property (your rehab, I am assuming that all costs are capitalized in your situation, but you will want to review that) and the depreciation, B. The new loan taken out, and ultimately cash in hand due to the refi, and C. Your income/loss in the given year for taxes (passive income).  You will want to make sure to separate the costs incurred as part of the rehab, vs the costs incurred as part of your operations (i.e. property taxes, eviction costs, etc).

Please see my answers to your questions below:

1. The cash out refi will not effect your taxes.  Even if the cash from a refinance comes back in a different year, there will be no taxable impact to you (other than the change in interest rate being paid due to a higher mortgage, and the amortization of your loan costs).  The loss in income (Taxable Revenue- Deductible Expenses) will be taken care of on your tax return, and is not a part of your basis.

2. No, the cash out re-fi will not effect your asset's basis.  However, your improvements to the property will.

3. Your capital gains/loss will be calculated as (simplified):

Amount realized from the sale of the asset (less selling costs)

less: original purchase price (and some of your closing costs)+capital improvements- accumulated depreciation

Don't forget your depreciation recapture too.

Hope that this helps!

Congratulations @Canneton Howard!

We are also newbies from Parker, CO and just finished our first full start to finish rehab in Colorado Springs and got it rented out last week to a very qualified tenant.

Let me know if you ever wanted to grab a coffee or something- I'd be really interested in chatting with another newbie who is investing in the Springs and hopefully we can learn from each other!

It was great meeting everyone tonight!

Thanks so much @Drew Fein!  I will see you at the meet up tonight, and would definitely like to chat with about this.