All Forum Posts by: Paul Caputo

Thanks @Carrie Cavins! Just trying to help out! Depreciation is my specialty so I like to explain stuff on here since working through posts like this makes it easier for me to explain it to clients with similar situations. Depreciation is often overlooked and misunderstood so I like spreading some knowledge on it.

Put your money where it works best for you. But also be smart and keep some money where it's safe and some where you'll get better returns with a higher risk. That's not just real estate that's all investing. 

If you're at a seminar, the person running the seminar is selling you on whatever it is. I'm not saying such seminars are bad, many are great but that's the reality. My firm does CPE Seminars and while they're educational and provide CPE credits they always produce business even though that's not the primary goal. A seminar on fixed index annuities may have the primary goal of selling you fixed index annuities. Look at the motivation of who is presenting the information. 

Depreciation is quite interesting @Ryan Taylor, it's one of the greatest untapped resources for all commercial and rental property owners. 

If she sells it she will have to pay depreciation recapture unless she does a 1031 exchange, which could be a viable option here. Depreciation would reset upon inheritance of the property to you. I'd just help her out with it if keeping since if she deeds it to you thats legally selling it to you. So you would get a cost basis based on what you paid for the property which would probably be under fair market value due to the relationship. So between the recapture and lower initial cost basis this doesn't seem like a great idea. 

If she can get double what she paid look into doing a 1031 exchange and avoiding depreciation recapture due to transferred cost basis. She can get into a better investment property, you can continue doing all the heavy lifting for her and then she can leave you a better property down the road. Or just sell it at market rate and cash out. Her max recapture at 10 years would be 10/27.5 = 36.36% accumulated depreciation which is taxed at 25% maximum (this decreases at lower incomes) or 9.09% of the initial depreciable cost basis. It's not nothing, but it might not be as much as you'd think. Sale profits would probably cover that tax bill due to the appreciation, but everything has to be accounted for before making an informed decision. 

Champagne taste, beer budget? Doesn't your $56K problem turn into a $44K surplus if you find a house that costs $450K? That's the real answer. Also think about why you're really keeping that NH rental, If you sell it to another rental investor the tenants will be fine and are they somehow special to you either way? Sure $24K per year is nice, but after all your expenses on it I'm guessing you're lucky if you're getting $12K per year out of it probably less. If you've put about $210K into it and you're getting $12K per year that's less than 6 percent ROI and that's optimistic, you can do much better with index funds. You can cash out now and use $210K to leverage against something else or go the 1031 exchange route and get a better $440K+ rental. Or keep it.

Don't sell the rental to get a bigger house. Get a house you can afford (Or maybe even less than that would be sufficient) and sell the rental for a better one. Talk to a professional like a CPA and they can help you decide what will work best for your individual situation. Maybe in a couple years smart decisions now will allow you to get an $850K home then. Wouldn't that be nice?

It's not that it's traditional real estate, it is residential rental property. Page 9 of Publication 527 specifically includes mobile homes in "any real property that is a rental building or structure (including mobile homes)" So your colleague is incorrect; the manufactured home is residential real property, not tangible personal property (chattel). However there is some tangible personal property in the mobile home (e.g. the carpet, window treatments, etc.) that does qualify for 5 year depreciation. The problem is knowing what's what so most just lump it all together under 27.5 year to "be safe" and not overstate your deductions since that opens you up to fines and penalties. The IRS usually doesn't care if you understate your deductions. Here's the problem: the carpet is considered 5 year tangible personal property, but the tile is considered attached to the floor and therefore a building component so it's 27.5 year residential real property. If you put wallpaper on the walls that is considered 5 year property because you can remove it easily and not damage the wall. If you paint that wall the paint is considered attached to the wall and therefore a building component and 27.5 year property. This goes on for every single thing in the building, depending on what it is and how it's used it may qualify for accelerated depreciation and it may not. The rules continue to get more complex, like I said the Tax Code is thousands of pages, it's updated constantly, doesn't always make sense and useful information is buried in pages and pages of stuff that doesn't apply to 99% of taxpayers. 

MACRS(Modified Accelerated Cost Recovery System) must be used with all residential rental property, commercial property and leasehold improvements. The easy way to do this is lump it all together as residential real property and depreciate over 27.5 years. The hard way is to separate out the costs of the structural components from the tangible personal property and depreciate accordingly with structural components over 27.5 years and tangible personal property over 5 years (rare exception some 7 year property) and being a mobile home there would be no land improvements which would be 15 year property. 

If you own an entire mobile home park it would make sense to go through the trouble of properly depreciating with cost segregation, but if you're just looking at one mobile home the costs of going through all that outweigh the tax benefits of doing so.

If it's been updated well this sounds solid. I'd try to find out if there's been any renovation, if so a lot of the hard work might already be done for you, but that might be the reason the owner wants to sell so they don't have to fuss with it. If there's major stuff that hasn't been updated you may be looking at a money pit, but a lot of older homes were built to last and may be better put together than a new home. Get a good inspector to really find out what's going on under the hood of this old place. Figure out what you might have to replace and factor that in then figure out if it makes sense in the long run to put that cash into it or something else.

I'd see renting it as an expense you could apply directly to the project and deduct, but when you buy it there's an assumption you'll use it again on future projects and probably for a number of years. I'm also assuming the nail gun is at a low enough cost that you can expense it in the current year and not have to depreciate the equipment, but that would be a business expense of purchasing equipment not something that you'd attribute to the house specifically. If you regularly do fix and flips it might be a good time to get a CPA involved to help with this type of stuff. A good one will be well worth it.

Depends how you use it. If it's rental property it's 27.5 years. If it's commercial property it's 39 years. If it's your home it's non-depreciable. An accountant would probably be able to help you with applying this properly. Since the manufactured home is already separate from the land you're able to skip a step and the purchase price of the home (not including the land lease) is your depreciable cost basis. So you simply divide the purchase price (plus any improvements, based on when they were placed in service) by 27.5 and you get the annual depreciation. This is 3.636% of the depreciable cost basis. You need to adjust the first and last year based on when the property was placed in service: if you placed it in service in October you'd have 3 months worth of depreciation for the year, and the last year would be adjusted up from 6 months to 15 months, 12 months the 28th year and 3 months in the 29th year. 

If you want to read the Tax Code have fun it's thousands of pages. Depreciation is discussed in IRS Publication 946 (How to Depreciate Property), IRS Publication 527 (Residential Rental Property) and IRS Publication 544 (Sales and Other Dispositions of Assets - covers depreciation recapture). There's also the tangible property regulations and dozens of revenue procedures and private letter rulings addressing depreciation. 

If you really want to break it down there are assets in a manufactured home that qualify for accelerated depreciation as tangible personal property, but going through the trouble of identifying such assets at this level generally doesn't make financial sense. 

Does that help?

Homestead is only for your Home. It's right there in the word, but you could get another one with your next home. 

This might help explain it: http://www.investopedia.com/terms/h/homestead-exemption.asp

Depreciation starts when the property is placed in service. So the depreciation in the first year would be 2 months worth for November and December. You depreciate rental property over 27.5 years which is 3.636% of the depreciable cost basis (property cost less land value = depreciable cost basis) per year. In your situation you have 2 months of depreciation the first year so in your first year you get 1/6th of what you'd get in years 2-27 or 0.606% of the depreciable cost basis. 

So no you can't deduct the same in the first year as in later years it basically has to be pro rated.