All Forum Posts by: Mark Patel

Thanks for your detail reply.  I believe I understand the tax implication of depreciating a expense like roof.  The key point you made was that the adjusted cost basis was increased to include the roof expense.  I was not sure if that was the correct process.  If you dont include the roof expense in your cost basis then the roof replacement cost would be counted as a gain upon sale.   

Thanks

I have a question on deprecation recapture and the tax consequence.  When you depreciate a expense like a roof then sell the property.  It seems that the roof expense become a capital gain since you have to add the depreciation recapture back in to the cost bases.   

 The best way to ask it is to provide a made up scenario to highlight the point above. 

Baseline assumptions for this example:

-Investment single family home is purchased for $100k in year 1 and sold for $100K in year 10

-The home was 100% rent ready on the day of closing (no rehab needed) except for 1 item that is listed below. The tenant moved in on day 1 and stayed for 10 years.

-The home is depreciated at $1k per year or $10K deprecation over the 10 year of ownership. This amount is just for example purposes for easier math.

-The rental property made Zero dollars each year in profit. The rental income and expenses were equal and on the tax return the net effect is the depreciation loss that is taken each year.

-Upon sale in year 10 there is no 1031 exchange and the owner will pay capital gain tax if any.

- You can not offset real estate loss from you regular W2 income for the 10 years due to tax rules (you make too much in W2 income, not real estate professional, etc etc)

Scenario #1

After purchasing the rental home the roof was replaced at $5K. The $5K was written off as an expense for that year. Again this is just an example as this could be a $5K roof or a $500 stove etc. Since the assumption is that in all 10 years the property makes $0 dollars profit then this $5k is written off and is carried forward year over year until there is a profit or property is sold

Scenario #2

After purchasing the rental home the roof was replaced for $5K. The $5K was depreciated over 10 years or $500 / yr on the tax return. Again the numbers are just an example to make the math easier and the actual deprecation length of 10 years is just for easy math in this case.

Question:

In year 10 when the property is sold what is the cost bases and what is the capital gain that will be taxed when filing the tax return for both scenario above? Below is my analysis and need to understand where I might be incorrect:

Scenario #1: $100K purchase - $5K expense that has been carried forward year after year + $10k home depreciation recapture - $100 sale price = $5k in capital gain in year 10 upon sale of the property.

Scenario #2: $100K purchase + $10K deprecation + $5K roof deprecation recapture - $100K sales price = $15K in capital gain in year 10 upon sale of the property.

Thanks

Nate,

The area rent for that type of home is $2200 to $2400.  Lease option seems to be a possibility but are their legal issues with doing that in Texas?  Also how would the lease option work without paying off the underlying mortgage first?

On the carry back how would that work?  Would you keep the existing loan?

Thanks

Mark

All,

One of my tenant (lets call her Julie) is the power of attorney for her mom's assets /medical treatment.  Julie's mom needs to sell her house and I need ideas on what strategy would work. The details are below:

SFH in Houston, 3-2-2, 2420 SQ, built 2007, Current loan amount $191k with BOA with $1800/month including PITI, Loan is under Julie's mom name only, the current as is value is $205k. ARV is $250k, Repairs $18k.

Julie's mom is in nursing home and she has been behind on paying the mortgage for over 4 months. She can not afford it (all money going to pay for nursing home).    She does not want to put any money into to the home and the easy way out is foreclosure.  This is not an issue since her mom does not care about her credit and will never live alone (permanently in nursing home).  Julie is perfectly happy giving the keys to the bank. She is willing to sell it to me but it can not cost her any money.  Besides a short sale any other creative way to make this work or just walk away?  I can do flip or rental.  (currently have 10 rentals)

Can a investor negotiate with Bank directly on short sale or is real restate agent required by banks?  If not then what is the best way to approach the bank?

Any other creative financing options I should consider?

Mark

Brandon,

I did not list every detail as my real question was on the remaining depreciation.  To clarify:

1) The property was separated for land and improvements. Only the improvements were depreciated

2) The rehab repair cost was all taken as repair and not depreciated as it was minor. When you say capitalized you mean depreciated over XX years correct?  CPA said to count it as repair since tenant signed lease before rehad was started. She wanted to lock in the place while it took 4 days to complete the small rehab.

3)The roof was done over the longer 27 years and floor over the shorter period.  

Thanks

Mark

Cory,

Thanks for the reply. Let me clarify with some more details:

Jan 2011 = bought home for $75k

Feb 2011 = completed rehab for total $2100

March 2011 = tenant moves in.

April 2012 = filed tax return with cost bases of $75k for the house and the fully deducted the $2100 on my return as repairs

July 2012 = replaced roof ($5.5k) and tile ($3k)

April 2013 = filed tax return and started to depreciate the roof & tile expense over ~5 years (what ever turbo tax said I should use).

May 2015 = sold home for $136k. Of the total roof+tile cost of $$8.5k I have already depreciated around $4k on previous tax returns. So I still have around $4.5k yet to be depreciated.

What is my cost bases on the sale of the house? The above numbers are approximate but the real question is what happens to the remaining $4.5 that was not fully depreciated yet? I know that the house depreciation gets added back. I will call you as I am interested in additional properties in Southwest Houston (Mo City, Sugarland, Stafford, etc)

Thanks,
Manish

I bought a new roof and new flooring in 2012 for my rental in Houston and have been depreciating it every year. This year I sold the home for $136k and want to make sure I capture the correct cost bases. I paid $75k for the home, $5500 for new roof (in 2012) and $3000 for all new tile (in 2012).  Since I only depreciated part of the total repair cost ($5500+$3000=$8500) from 2012 to 2014 what happens to the remaining amount that I did not get a chance to utilize yet since I sold the property before I fully depreciated the improvements?  Another words out of the $8500 in improvement cost I used only $3000 in deprecation to lower my 2012 to 2014 tax bill.  What happens to the remaining $5500? 

Thanks

Mark

My question is related to this thread.  What happens on depreciation recapture in the following two cases:  1) Regular home value deprecation and 2) home improvement , like new roof, deprecation?   I know that when you sell the property, in the case of item #1 above, that all the amount you deducted over the years gets added back in to the bases.  My question is what happens to all the depreciation you  took for the new roof?  Does it also get added back to the home cost bases thus increasing your taxable gain?

Mark Patel

The promissory note does not mean anything. It seems that all they want is to get the deposit back and skip town. It seems unlikely that they will pay you 4 month of rent at some time in the future in exchange for you to give them 1 months of deposit refund. Officially you need to look at your lease but a standard Texas lease says that if the tenant is in default then you have the right to accelerate rent payments.  If they have not paid their rents then you get to keep the deposit.

All this changes if you made a deal the tenant and have some agreement to refund the deposit prior to them moving out.

Mark