All Forum Posts by: Account Closed

You will not be able to deduct any expenses incurred while the house is still your primary residence.

After you vacate the premises AND advertise the property for rent, you still will not be able to deduct as expenses anything spent for "improvements."

But, at this point, provided that the property is livable and you are ready to rent the property, you will be able to deduct from the rental income at the end of this tax year the expenses that you incur in making the necessary repairs to make the property more acceptable to a renter.

This period of time prior to having a renter is tricky, but the IRS is very reasonable as long as none of the items are very large.

I hope this helps.

Good Luck.

Michael Lantrip, Author "How To Do A Section 1031 Like Kind Exchange."

Allen McGlashing:

You might want to try to work to improve the situation and the relationship, but since it is what it is, here's what you might want to do to handle it.

1.)  Get a Receipt Book with consecutively-numbered pages.

2.)  Each time that you receive cash, state the date it was received and the rental period it is for.

3.)  If the rent does not cover the coming week, meaning there is an balance due, write on the receipt the amount of the balance due and the rental period it is due for.

4.)  Sign the receipt and have the tenant sign the receipt.

5.)  Keep the original in the book, and give the copy to the tenant.

Also, you might want to check the wording in the Lease to find out exactly what his obligation is.  If he is obligated to pay you $1,300 per month, then his weekly rent should be $300.02 instead of $325 because there are 4.333 weeks in the month.

This could be a problem if it comes to an eviction.

I hope this helps.

Good Luck.

Michael Lantrip

Dimitri Carso:

I assume that by "rented it for several years" you mean more than three.  That would mean that at this time you do not qualify for Section 121 exclusion of your capital gains on the sale of the property, because you have not owned it and occupied it as your primary residence for two of the past five years.

So, your question is can you move back into the property and occupy it for two years and qualify for the Section 121 exclusion of up to the maximum limit of either $250,000 for a single taxpayer or $500,000 for a married taxpayer.

The answer is that you cannot.

If you move into the property for two years and qualify for Section 121 treatment, you will have two years of "qualified use," and a number of years of "non-qualified use" that would be equal to the number of years you have owned the property minus the two years of "qualified use" as a primary residence.  You have lost the prior qualification.

Divide the two years of "qualified use" by the number of years that you have owned the property at the time of sale, and you have the fraction to determine your exemption amount.

Therefore, if your "non-qualified use" period is 8 years, you will be able to exempt two-tenths, or 20% of the capital gains under Section 121, but this is the "true" capital gains, the difference between what you paid for the property and what you sold it for.

The other 80% will be taxed as Long Term Capital Gains, and you will also have to pay taxes on your Depreciation Recapture for the depreciation that you took while the property was a rental property..

Of course, you could defer the taxes by purchasing another investment property.

I explain how to do this in my book.

I hope this helps.

Good Luck.

Michael Lantrip

Mike Roddie:

Putting the tax question aside, since only you have access to the records needed to analyze that situation, the real question that I think about is one of liability.

Would you be comfortable having someone injured or killed in one of your properties, through no fault of yours, resulting in a million dollar judgment that would end up taking everything you own?

Or would it be better to have that property owned by an LLC, and you only lose whatever equity you have in the property?

Sorry to be such a downer, but life is like that sometimes.

Good Luck.

Michael Lantrip

Kyle Zochert:

Be very careful.

In Texas, once a lien on property is filed, it is on file forever and part of the chain of title until it is released with a Release of Lien.

You can research this yourself in the County records, and find a level of comfort depending on your experience with this.

You can even buy someone else's opinion regarding whether or not there is a lien on the property.  But it is just an opinion.  If it's wrong, you have no recourse.

The biggest problem that I have seen in 40 years of tax sales in Texas does not involve recorded or unrecorded liens.  It involves the fact that the taxing authority and the law firm that they have contracted with to handle the tax suits just do not identify all of the owners who are entitled to be notified that the property is being foreclosed on.

Tax sales are usually a mess.

The tax deed itself even says that it does not even claim that the property exists, as well as not guaranteeing that you are receiving title.

The only way you can be safe is to have a title company do a title search for you.

I hope this helps.

Good Luck.

Michael Lantrip.

As I said, there is no such thing as an "S Corp."

That is a tax category status that has been elected by either an LLC or a C Corp.

Either you create an LLC, elect to be taxed as a corporation, and then file Form 2553 to be treated as an S Corp for tax purposes;

Or you create a C Corporation and file Form 2553 to elect to treated as an S Corp for tax purposes.

You cannot be an "S Corp" unless you are first an LLC or a C Corp.

"S Corp" is just a tax category status.  It allows you to report your income and expenses on Form 1120S, and have the income drop through to the shareholders/members for taxation.

It is perfectly alright to refer to your entity as an S Corp, but just understand how you got there, because it makes a difference whether you started as a C Corporation or as an LLC.

I hope this helps.

Michael Lantrip

I try to stick to just providing information.

I couldn't possibly know enough about your situation to give advice.

Thanks.

Michael

Let's establish some facts and terms first.

1.)  An S-Corp is not actually a separate business entity that is created.

2.)  Being an S-Corp means that you are already a business entity of some type and you file IRS Form 2553 with which you make an Election to be treated for tax purposes as a Subchapter S Corporation.

3.)  The primary feature of S Corporation status is that the income of the entity will drop through to the shareholders and not be taxed at the entity level, and it will not be treated as self-employment income.

4.) An LLC can be created, it can choose to be taxed as a corporation, then it can file Form 2553 to be treated as an S Corp for tax purposes, and it will refer to itself as either an LLC or an S Corp. But it is actually an LLC that has elected S Corp tax treatment.

5.)  A regular corporation, called a C Corporation can be created and Form 2553 can be filed, and the entity will be referred to as an S Corp.

6.) So, traditionally, "S Corp" means a C Corp that has elected Subchapter S tax treatment, and does not mean an LLC that has elected Subchapter S tax treatment.

7.)  Lately, however, the two terms have been used interchangeably, and this is causing confusion when it comes to asking question, and even more confusion when the questions are answered.

Sorry if I rambled a bit, but we need to be as specific as possible and we will get better exchange of information.

I hope this helps someone.

Michael Lantrip

Three points:

1.)  The property is now owned by a legal entity called a General Partnership and held in the names of the three partners.  You will be transferring ownership of the property to another legal entity called a Limited Liability Company.  Does this meet the legal definition of "sale" as in "due on sale?" Yes.  It doesn't matter if the ownership of the two entities is the same.

2.)  Once you transfer ownership, you lose all of the title policy protection you received when you bought the property.

3.)  Once you transfer ownership, you lose any guarantee, stated or statutory, that you received in the deed that put the property in your names.

There are probably more points to consider, but I don't have that information.

Incidentally, if the LLC were sued, and the Plaintiff Attorney requested the Court to pierce the veil and allow each of you to be sued individually because there was no legitimate business purpose for the LLC except shielding liability, you would have to defend that argument (I never predict what a Judge will do, they often don't know themselves until they do it).

Be careful with this.

Good Luck.

Michael Lantrip

@Matthew Teifke

The question is what did you pay in order to get the property into your name.

It appears that you paid $150,000.  (Buy maybe not, see Below).

You paid the owner $30,000 cash, and instead of getting your own mortgage for $120,000 you assumed his mortgage of $120,000.

If that is correct, your basis in the property is $150,000.

You need to keep the documentation of your $30,000 payment and the agreement between you and the original lender regarding your assumption of the mortgage.

But you cannot "turn around and sell this property" in a Section 1031 Exchange.

A Section 1031 Exchange permits you to defer capital gains when you sell "property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."

In other words, sell one investment property and buy another one.

In order to use Section 1031 you must first hold the property and use it as investment property for at least a year and a day, and not be actively trying to sell it during that period of time.

At the end of that period you must then qualify under the other rules for a Section 1031 Exchange.

You cannot use a Section 1031 Exchange for a flip.

Also, you said that you "paid $30K to get the mortgage current and assumed the mortgage amount of $120,000."

If you paid $30,000 to the mortgage company instead of the owner while the property was still in someone else's name, and then assumed a $120,000 mortgage in return for a deed to you, your basis will only be $120,000 instead of $150,000.

You would need to have entered into a written agreement beforehand stipulating that part of your payment for the property would be the direct payment to the mortgage company of the $30,000.

I can't tell you where to go for more information but if you look around on this post you might see somewhere.

I hope this helps.

Good Luck.

Michael Lantrip