All Forum Posts by: Paul Allen

@Craig Fitzsimmons: When dealing with rental properties - very generally speaking:

-Costs of acquiring the loan are amortized over the life of the loan.

-Costs of acquiring the property are capitalized and depreciated over the life of the property.

-Operating costs are expenses deductible in the year paid.

Take your settlement statement(s) and other expense records to a tax professional for more precise guidance.

Congratulations and good luck!

You can deduct the mortgage interest on up to 2 personal residences in a year, but the total of the mortgages has to be under $1M, so you will have some interest that is not deductible on your personal property.

You can deduct the interest on your rental property on schedule E from the date it is placed in service. The mortgage on the rental property does not count against your $1 million dollar mortgage limit. The $1M limit pertains to property held for personal use, not business property.

Does it make good business sense to pay down the loan on your primary residence to below $1M just because some of it will be non-deductible on your taxes?  I can't answer that for you, but I think it is the question you should be asking.

Properties are placed in service when they are ready and made available to lease. Your description seems to meet that standard.

Not sure where you are getting your definition of an improvement. You could make improvements to a kitchen or bathroom and they are still a kitchen and bathroom - no change in 'original purpose'. 

Going over the details of your situation with a tax planner familiar with real estate is the best way to get a complete picture of the tax implications of your renovations.

@Wilson L. If the renovations are completed prior to placing the rooms in service as rental property, then they are not 100% deductible in the year they are accomplished. They would need to be capitalized and depreciated along with the portions of your house that are business property.

If the renovations are completed after the rooms are placed in service as rental units, some of the costs may be fully deductible in the year they are paid. It depends whether they are repairs/maintenance or improvements. 

Recommend getting a tax planner familiar with real estate to help you determine the best way to proceed.

Best of luck with your business venture!

Hi @Mallory Jakiel,

Welcome to Bigger Pockets.

The devil is ALWAYS in the details with real estate tax questions, so this response is VERY generic - but generally there would be no difference in the tax treatment in your two scenarios. You are going to be claiming a depreciation expense for the acquisition costs over 27.5 years in either situation, and your rehab costs are (essentially) going to be given the same tax treatment as acquisition expenses. If you have actual properties in mind, please consult a local tax professional familiar with real estate before you decide.

In another observation, your income appears to be sufficiently high that you may not be able to use all your real estate tax losses each year. Real estate losses are known as passive losses. Only $25,000 of passive losses from residential real estate can be subtracted from W2 income in a given year AND only when your wage (active) income is less than $100,000. Between $100,000 and $150,000 your ability to claim passive losses begins to phase out. If your passive losses in a given year exceed your passive loss limitation the losses are 'suspended'. You can use your suspended passive losses in a subsequent tax year when you have more passive income, or when you sell the property.

If that seems like a foreign language you should get the BP real estate tax book. It could be a big help.

Best of luck with your investing!

The volume and nature of your questions indicate you should seriously consider hiring a tax professional now that you are a real estate investor. If you are reluctant to do so, then you need to get serious about educating yourself on the internal revenue code's treatment of real estate. Bigger Pockets has an excellent book by Amanda Han to get you started. As a military person this property likely represents a significant investment for you. Taxes are a big part of the 'real estate game'. Don't cost yourself thousands trying to save a few hundred on tax preparation.

And definitely don't be the next guy to walk into my office begging me to fix his tax nightmare because Turbo Tax was free.

Thank you for your service. Best of luck with your investing!

I suspect that if you took $140K out of the trust to pay off your personal debts (mortgage and S/L) you would be mighty unhappy with your tax situation the following spring.  Trust distributions are nearly always taxable as income to the distributee.  Make sure you understand the tax ramifications before you start moving money around.

If you loaned them $15K and they repay you $20K, then you have earned $5K of interest income, and it is required to be reported as such.  Repayment of the principal (the $15K) is not income to you, just the interest.

Your idea to avoid taxes by accepting payment in other than cash does not change the fact that the interest received is income to you. 

Good Luck!

@Michael Hajduk how much CG are we talking about?

Section 121 (c)(2)(B) indicates you would qualify for at least a ratio of the exclusion because you were forced to relocate due to a change in employment location. Your ratio being roughly 22 months/24 months (the actual formula uses days) or 0.917

Frankly, if you were forced to relocate based on military orders I'd say that was still your primary residence until it became a rental. There are numerous provisions in the law that stipulate military personnel on orders are considered to be residing at home. I can't find a citation for that position, but I'd feel confident claiming a reasonable basis for making it.

Thank you for your service. Stay safe over there!

@Ethan S.

These folks at Seeking Alpha built one in Google Sheet you can download:

https://docs.google.com/spreadsheets/d/190EuUMZLBDKApqic4oUMXVA1l8Uvm7UEgVVHnJxpi_g/edit?usp=sharing