All Forum Posts by: Joe Splitrock

My first response was no, but you could lend them the money and secure it against the property. When you close on the property, they pay the loan off as part of closing. There is risk here, but at least they can't sell the house to someone else without you getting paid. Can you just do a fast close with cash?

Quote from @Michael Donovan:

My wife and I are interested in starting to invest in real estate to create passive income for our retirement. We're both 58 but I have heard on many occasions that you're never to old! Anyway, we currently owe around $380,000 on our current home mortgage. It would be fair to say that the home would sell for around $550,000 to $600,000. My wife also is a co-borrower on our son's home on a mortgage of about $200,000 which was purchased about a year ago. At this time, my wife is the only income earner which last year exceeded $500,000 with salary and commissions. Would this scenario make it difficult to secure mortgage funding for an investment property? If not, what are some suggestions on how to make that happen? We appreciate your suggestions! 

 Your wife has a high income and strictly based on your mortgage payment, there would be plenty of income to qualify for investment property mortgages. Of course, that assumes you are being responsible with your money. If you are both driving $100K vehicles, have expensive toys like a speed boat and are taking exotic vacations, you could be high income earners that are over leveraged. I am assuming you are responsible, so you likely have cash savings and substantial retirement accounts in the stock market. If that is the case, you will have no issues qualifying.

@Bradley Pitts not exactly. Per the IRS, all rental property investing is considered passive income. The differentiation is material participation or participation as a real estate professional. These differentiations determine if you can take passive losses against active income. Active income is from salary or commissions. An active business is one which you actively participate, like house flipping. This should not be confused with rental properties, where you may participate, but it is considered material participation. 

Material participation means you are actively managing the property making key management decisions. There is no minimum time threshold, but generally if you are hand off on managing your property, then you are not materially participating.  Anyone who materially participates can take rental losses against active income, up to certain thresholds. This is called passive activity loss limitations. You can deduct up to $25,000 of passive losses against active income. The actual loss limit starts decreasing when you reach $100,000 and ends at $150,000.

Real estate professional status allows you to deduct all your passive losses against active income. To meet this designation you must be in a real estate profession, such as a real estate agent or full time investor. You must work 750 hours a year in this profession and it must be where you spend more than half of your time working. In other words if you had a full time job in a non real estate profession, it would be impossible to be a real estate professional. 

As far as the tax deductions you mentioned, you can claim all these deductions regardless of status. The difference is how you treat a tax loss. If you can't claim it in the current year, you will need to carry it forward to future years.

https://www.irs.gov/pub/irs-pd...

You can buy thousands of acres of useless land on earth. You want land that is desirable, ether due to location (warm climate, population center, near water, island, etc.) or what is contained under ground (gold, oil, etc.). 

Quote from @Jennifer S.:

@Tyler Brown I like the suggestion of making tenant pay for installation. luckily I can hook the electrical directly to the tenant's unit so I'm not responsible for her electrical costs.  

 Just make sure you get something in writing that clarifies the charger stays at the property when she leaves. You may verbally agree to split the cost, then she may want to take "her charger" with her when she moves out. Get it in writing.

@Pal Sa I have been doing this a lot of years. You can have the nicest person in the world, then deny their application and they turn nasty. I have even had tenants that were wonderful for years, then I deduct money from their deposit and they are yelling swears at me or threatening to sue. You just never know what people are really like. You should only be screening based on credit report, criminal background, income and previous landlord references. I have had some wonderful tenants who were a little direct/rude. I don't care as long as they pay rent and take care of the property. You are not here to make friends. If you are the type that is easily offended by aggressive people, you probably need to hire a property manager. Dealing with people is the number one skill needed as a PM.

@Micah Shelton I don't agree that it is best for a buyer to increase price and lower interest rate. An investor can claim interest deduction in the year it occurs, whereas increased selling price adds to basis. You will end up with added depreciation at the higher selling price, but most likely the interest will be a larger write off. Also keep in mind that depreciation is recaptured and taxed at the time of sale, interest is not. Of course a lower buying price means higher capital gains when selling, but long term capital gains is the lowest tax rate. The other consideration is that you can refinance the property, so you are not stuck paying high interest for the life of the loan.

As far as your question about borrowing money, there is no benefit to private lender in what you propose. Why would someone lend you more money at a lower interest rate? In the case of seller financing, the seller is getting higher value for their property. In the case of a private lender, they are not getting paid back more money, they are just lending more money. It is actually more risky, because they are lending at a higher LTV, so they should charge a higher rate. If your intent is to pay back more principal than you borrowed, this is the same as paying interest. The only way to change this to equity is giving ownership stake in your investment. That is an option.

@Dylan Baxter based on what you are saying, this sounds like a prorated (partial) exemption assuming her parents home is 50+ miles away. Just give your tax professional the dates and they can calculate what you qualify for. Since you will be there for most of the two years, the impact should be minimal. 

No, but there is a minimum rate per the IRS that you must be above or face imputed interest. The imputed interest is an assumed rate of collection that you must pay taxes on. For example if you charge 0%, you would be forced to pay taxes on some assumed amount above that. That is so that people don't charge 0% interest on loans and just bury the interest expense in the selling price to avoid taxes.

https://www.irs.gov/applicable...

Quote from @Anthony Jordan:

Michael, Joe, 

I appreciate hearing both of your perspectives. This gives me a lot to consider and think about. 

 I would listen to @Michael Plaks over my comments, which was a misunderstanding based on IRS wording. His comments explaining the difference of unrecaptured Section 1250 gain is correct. If you want to download and read the entire boring IRS code covering this, have fun. This is why I use a CPA with tax expertise. There are far too many nuisances in IRS code for someone to master it on a part time basis. On top of code there is also case law interpretation and continuous changes, so this area is better left to experts. If you are doing seller financing, I would tell the seller to consult their tax professional and attorney for their own protection. 

https://www.govinfo.gov/app/de...