All Forum Posts by: Pavan K.

@Pavan K. Depreciation isn’t optional, it’s required by the IRS, and not claiming it means you pay more tax now while still facing depreciation recapture (up to 25%) when you sell, even if you never took the deduction. On a $600K property, you’re likely missing out on $18K+ in annual deductions, which could save you $6K+ per year in your 32–35% tax bracket. You should ask your CPA why they advised against it, whether they’re aware of IRS recapture rules, and how they justify not using depreciation to offset rental income. Also ask if you can file Form 3115 to begin depreciating this year and catch up missed deductions. If their reasoning doesn’t hold up, it may be time to reconsider your CPA.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Several notes: 

1. $50k land value on a $600k property sounds very low / possibly incorrect 

2. That price for a cost segregation study is on the high end for a single family home 

3. "I would need to get a cost segregation study done  in the first place" Need to get it done for what? 

4. Without a cost segregation you depreciation the building value of your property across 27.5 or 39 years. It's not required in any way. 

With a cost segregation study your building value will be broken out into many detailed components which will have lives of 5,7,15 and 27.5/39 year  lives instead. Allowing you to accelerate some of the depreciation. (and utilize bonus depreciation on the assets with lives of 20 years or less)

5. Possibly most important: can you utilize any losses generated by the rental property? Or will you be subject to the passive loss limits? 

Without a specific use for losses generated; utilizing a cost segregation study to generate large losses you can't use won't benefit you. 

- Are you or your spouse an IRS real estate professional? 
- Is this a Short-term rental? 
- Do you have other passive income sources? 

-Is your Adjusted gross income under $100k which would allow you to use some amount of passive losses?

Why would you ever consider taking a listing down when it’s not renting? You are losing thousands of dollars a month in potential rents and actual expenses. Vacancy is the biggest killer of profitable rentals.You’ll never be able to get it rented if it’s not listed. It is better to lower the price and shift the lease ending date late spring.

@Pavan K.

Risks?  Let me count the ways!

First - if there is a bank loan - they will insist on being in first position.  So now if anything goes wrong, you are not at all guaranteed to get your money back - or put another way the bank gets first dibs.  Lots can go wrong... It could be anything... a mistake in estimating, a cost overrun, or something like the place burns down and the insurance wasn't properly taken out, or theft (of the money outright) or theft of materials along the way.    

My buddy just got burned by someone borrowing from multiple people where the others weren't aware of each other and they thought they were the only one lending, etc.

It all comes down to how well you REALLY know each person in the deal, and then, "do you REALLY know them?"  It is hard to even know where the problem could come from.  The fewer people involved, the better.   I would be asking, "If there is a bank loan involved, why do they need MY money?  I'm guessing for the down payment?  Which translates to, "I can't afford to really do this, let me spread the risk."

My friend who got burned would say, "Don't lend any money that you can't afford to lose."  I would say, "Deals like this go fine all the time... until they don't!"

All the best!

Randy

If they want your money, @Pavan K., why aren’t they offering you a stake in the partnership? This sounds like it could be a good deal for the partners, and perhaps the bank, but a terribly risky deal for you, with little upside.

What exactly do you mean by, “There will be a promissory note drafted for the amount and the duration and interest rates”? This is not even close to the documents required for a properly drafted loan. Do you think the bank’s loan will consist of one document, drafted by your borrower? Did your borrowers mention securing your investment with a recorded mortgage or deed of trust, personal guarantees, lender’s title insurance, or anything else? Of course not. Even this is an incomplete list.

Worst of all, the main reason not to make this loan is that you will not hold a first position-lien against the property. This means that if the bank forecloses, and you can’t pay it off, you will lose all of your money with no recourse to anyone.

One option to secure your loan is if one of the partners has a free and clear property worth significantly more than your loan. In this case, you could use it to cross-collateralize your loan with a first-position lien. If their deal goes bad, you could foreclose on that property and hopefully recover your funds. If not, don’t even think of this.

No matter what, consult a qualified lending attorney to understand your legal options and ensure you have proper loan documents in place to protect your investment.