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Discussion Forum

Tax ? re % costs on a rental property

joeh | Posted in General Discussion on September 16, 2007 01:57am

Situation is; looking at buying a property out of state, couple acres with a modular on it.

Rather than pay cash we are thinking of large down & the balance from a home equity line of credit. Big enough down to make the payments/rent break even.

Last few years we have had just the standard deduction as we have virtually nothing in the way of itemized deductions. The % on the home equity still won’t get us past the standard deduction I don’t think.

So, as we will be using the new property as a rental, question is, is the interest on my loan here deductible as a cost on the rental?

I’m thinking of calling the IRS Monday, but in the meanwhile what do the rental experts here think?

My alternative would be to get a new loan against that property, but a loan to buy a rental will cost me more than the other way.

Last choice is pay cash but would rather not.

Joe H

Is ; correct usage in first line, or should it be a : ?

 

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  1. peteduffy | Sep 16, 2007 02:04am | #1

    : is correct

    (colon)

     

     

    Pete Duffy, Handyman

    1. joeh | Sep 16, 2007 02:09am | #2

      So, guess I blew that.

      Been a loooooooooong time since English class.

      Joe H

  2. mike_maines | Sep 16, 2007 02:12am | #3

    Neither is correct; it's a sentance fragment.

    I believe the interest on the HELOC would be deductable as it is a cost of doing business.  I would ask my accountant though. 

    1. peteduffy | Sep 16, 2007 02:26am | #4

      Yeah, technically, Mike is correct, but I saw the implied "The" and "I'm".Pete Duffy, Handyman

    2. joeh | Sep 16, 2007 02:39am | #5

      Neither is correct; it's a sentance fragment

      It's a sentence fragment, Mr Speel.

      Joe H

       

      1. mike_maines | Sep 16, 2007 02:45am | #6

        Doh!

        I've finally gotten trained on "definitely" and "separate" thanks to Breaktime.  Gotta work on "sentence" now it seems....

        Who is Mr. Speel?  I wiki'd it but didn't find anything....  Am I dense or what? 

        1. joeh | Sep 16, 2007 02:53am | #8

          Mr. Speel is Mr. Spell spelled wrong.

          Just pulling your string.

          I have a couple words I always spell wrong, sometimes spell them right and then change to wrong after I look at them.

          Joe H

          1. Piffin | Sep 16, 2007 05:02pm | #18

            I always have trouble speeling Cieling 

             

            Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!

  3. MrBill | Sep 16, 2007 02:50am | #7

    Joe,

     I hate to say this, but I don't know if I would trust our Treasury Department to give you the correct answer. My Wife had some questions about taxes for a guardianship of her sister and the answers they gave her turned out to be totally wrong :(  I would find a goot CPA and even if you have to pay him for an hour of his time it will be money well spent.

     When I went into business many years ago, a friend told me that my best, and most important  employee would be my CPA and he was absolutely correct.

    Bill Koustenis

    Advanced Automotive Machine

    Waldorf Md

    1. joeh | Sep 16, 2007 03:11am | #10

      I have the same thoughts re the "Professional" advice from the IRS.

      Best thing to hope for would be a publication number that I could read.

      Thinking DanT is probably right, but the interest probably wouldn't get me past the standard deduction level.

      Joe H

    2. Piffin | Sep 16, 2007 05:01pm | #17

      I agree, there are too many if this and if that variations to the answer.Like whether it qualifies as a second home or as an investment property and how many weeks a year you rent it.... 

       

      Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!

  4. DanT | Sep 16, 2007 02:53am | #9

    The HELOC interest will be deductable against your income as a standard deduction as though it was borrowed against your house, which it is.  So the answer is no.  It is deductable but not against the rental income on the (forgot the number) rental form. 

    I would talk to your accountant to see which is more beneficial and by how much.  Sometimes based on amount and your true tax bracket it makes little difference.  DanT

    PS:  I have no opinion on the english issue as I am handicap in that area.



    Edited 9/15/2007 7:54 pm ET by DanT

    1. User avater
      BillHartmann | Sep 16, 2007 03:25am | #11

      The interest borrowed for investment or business purposed can be deducated against the income from that activity. For rental it goes on sch E.Money borrowed against your home can be deducted on sch A. So you have an option in this case.In most cases it best to take as investment interest. Even if the interest is enouch to go over the standard deduction it is still a disadvantage to put it on sch A unless all of your other deductions are already over the standard deduction. Also there is a limit to the deduction on a HELOC. IIIRC it is $100,000.PS, you should still use a Tax Pro for the first year. It is a big complicated to setup the initial depreciation. One of the things is that you need to break out the costing into property and improvements.And if this is mobile home that is still titled as a vechicle then that is another complication..
      .
      A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.

  5. PaulMarcelSummerlandCa | Sep 16, 2007 04:06am | #12

    The first 100,000. of your home equity line on your primary residence is deductable.  All business interest (rental Prop. is probably a busness) is deductable so the answer is yes! it is deductable.  You want to track the funds so you can prove you bought the prop with the borrowed money.

    You also have to materially manage the property (I think) and be in the buisness.  This means rich fat cats can not borrow on their house and invest the money to generate a net yearly loss as a deduction with out doing the work.

    You should go over this with your tax guy but generally I think it is a good deduction. 

    Be carefull not to borrow to much on your house as you could lose it if you can not make the payments (but it soulds like you have pleanty of cash).

    Think about paying POINTS and buying the rate down on your rental property loan.  Your points on a purchase are DEDUCTABLE but refinance points have to be amortised over the life of the loan.  But if you buy the loan down and rates drop you could refinance for the escrow/ title fees and effectively you have lost all the points you paid (but you still save some tax)  Loans are hard to figure out - good luck!



    Edited 9/15/2007 9:10 pm ET by PaulMarcelSummerlandCa

    1. User avater
      BillHartmann | Sep 16, 2007 04:14am | #13

      "You also have to materially manage the property (I think) and be in the buisness. This means rich fat cats can not borrow on their house and invest the money to generate a net yearly loss as a deduction with out doing the work."No, it is just to get large deductions. Not clear on all of the details, but IIRC you can loose $25,000/per year and still be deductable.To be "in the busissness" requires much, much more than activaley managing one property."hink about paying POINTS and buying the rate down on your rental property loan. Your points on a purchase are DEDUCTABLE but refinance points have to be amortised over the life of the loan. But if you buy the loan down and rates drop you could refinance for the escrow/ title fees and effectively you have lost all the points you paid (but you still save some tax) Loans are hard to figure out - good luck!"If you refi the loan any outstanding points can be deducted at that time..
      .
      A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.

  6. highfigh | Sep 16, 2007 04:56am | #14

    Most financial experts will recommend that you don't use the equity from one property to buy another. If something happens that makes it impossible for you to pay for the second one, the first is at risk, too. You would basically be using the main home as collateral. If the rent will pay the mortgage, do a traditional mortgage. If you can afford to pay the mortgage, even when there's no renter, you should be OK (it depends on where your money is and how liquid it is).

    As a rental, just about any money you spend on it is deductible. Travel to inspect/repair it, interview renters/application fees, fire insurance, taxes, phone calls to whoever will manage it, accountant, lawyer, tax prep, office supplies used fro management of the property, you name it.

    If it's a multi-family, plan on some vacancy periods. Charge as much as you can in that area. If it's particularly nice when you buy it, there's no guarantee that it'll stay that way.

    Oh, yeah- NEVER USE FLAT PAINT IN A RENTAL UNIT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    "I cut this piece four times and it's still too short."
  7. alwaysoverbudget | Sep 16, 2007 05:52am | #15

    landlording is what puts food on my table,so i'm going to beat you up a little,but first i will answer your question on tax deductability. what bill said is correct it is a expense against the income of the property and  completely deductable.

    now here come's the opinon you didn't ask for and here are the keywords: modular,out of state,big enough down to make it break even,buying so you have deductions.

    the only reason to buy a rental is to make money on it,either with monthly income or appeciation.first with a modular on it the appreciation is going to be far less than a stick built house next door.if you put enough down that it breaks even you are losing money ever month,lets say you put 25k cash down and the rent covers the payment. you are losing  the intrest that the 25k would bring in.[5%= 1250. per year]be sure and figure in a 10% vacancy and 10% maintence expense when your this close on a deal.

    the problems of manging a small rental from a distance can chew you up and spit you out. when it's vacant are you going to drive ther everytime someone wants to look at it? i may show a house 8-12 times before i find a tennant i want. other option is hiring a mangemant co. they take first month rent and about 10% a month for  watching out for you. and understand that there is nothing they like better than lots of tennat turnover,why?  becuase they get that first months rent each time.they will make sure that you have lots of deductions for tax time.

    find a place close to you,that will cash flow and don't over finance your home. search the bussiness section,i had a post there 3 weeks ago " need seasoned landlord advice"  i had a property go down 40%  in less than a hour,if my house was financed with a equity loan because of this house i would be in real trouble.

      i will throw this in i use to use a home equity to buy rentals, i could make a cash offer,buy low,once i owned it i would the finance it for about 80% of value which was usally just about what i was buying for. so the equity  loan is a great tool ,just don't become homeless because of it.

    my 2cents even though you didn't ask. larry

    hand me the chainsaw, i need to trim the casing just a hair.

    1. User avater
      BillHartmann | Sep 16, 2007 09:28pm | #22

      BTW, there was a tax case on these kind of deductions. It is mentioned in one the anual tax reference books.A guy had some rental property and borrowed againts the rental property to (IIRC) build a new personal home.He was not allowed to deduct the interest on his sch E as the money was not used for investment purposes.And he could not deduct it as mortgage interest on sch A as it the mortgage was not against the house.Also a friend of mine has some rental properties. One was sold with a wrap around mortgage.At the time she did not have enough deductions to go above the standard deduction.It was investment interest, but not against a property so the only place that it could be deducted was on sch A as investment interest. But that was lost.At the sametime she had to pay full taxes on the interest received from the buyer..
      .
      A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.

  8. peteshlagor | Sep 16, 2007 04:35pm | #16

    Highfish is right.  Keep the loan on the property involved.

    Besides a mortgage loan has a lower rate than a HELOC.

     

    1. Piffin | Sep 16, 2007 05:09pm | #19

      "a mortgage loan has a lower rate than a HELOC."That is true but a mortgage on an out of state rental can carry a higher rate than a home the buyer is living in. 

       

      Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!

      1. peteshlagor | Sep 16, 2007 05:12pm | #20

        Understood.  And for good reason.

         

  9. Knightdiamond | Sep 16, 2007 08:16pm | #21

    Joe,

    Whew! Lot to answer here. I bought a modular on a piece of property with acreage in the past. It was a great investment! It wound up being a wreck and I tore it down but I could not keep people out of it. They loved the place. But I digress. Most everything I read in response to your question was good. Some just "gooder" than the other. Here is my education that I paid the "tuition" for. LOL!

    Get a CPA to help you. Period. Interview them before you hire them for your own peice of mind. Make sure they understand your goals and the law. They are your frontline defense against the gestapo, err I mean the IRS.

    Next, don't mix your home monies with your investment monies. Try to make the investment pay for itself. It needs to stand alone. Plus, as some one else noted, you don't want to put your own home at risk.

    You can depreciate your rental just like a tool. Everything is deductible for the most part. See CPA note above.

    You will be delighted at the write offs for tools and all. Just make sure they are rental related purchases. See CPA note above. You will be doing lots of repairs. So be prepared. You'll be a regular Gary Sullivan by the time all is said and done.

    My rule of thumb was/is try to rent for roughly 1% of cost. (obviously, based on the market) This is/was difficult to do these last few years but there may be a correction in real estate these next few years to assist you in getting closer to that rule of thumb. (Not that that is what we want!) If you can do that you make roughly 10% return on investment. (Paid in cash monthly) Or depending on your equity, return on equity. You'll have to do the math on that. (Or see CPA note above) Its real easy arithmetic but you gotta have some accurate numbers. (Taxes, Ins and mortgage note) In the same vien. Try to put down at least 20%. That gives you 20 % equity right off the bat and gets you out of PMI.(Private mortgage insurance. Which is a very ugly expense) and gets your monthly note down.  The best book I have read on mortgages in the last ten years is by Carolyn Warren. Mortgage Rip Offs and Money Savers. ISBN 978-0-470-09783-0. This is a great book!!! You will be well served to read this before you get a mortgage. Very well served!

    I don't care for modulars myself but I have owned two and they were great rentals. I mean great.

    Good luck. If I think of anything more I'll post it.

    KD

  10. GHR | Sep 17, 2007 02:13am | #23

    I would the ":". (The """ looks better before the ".".)

    On the substance I would suggest a CPA for advice. They can compute your taxes both ways and give you an accurate response.

    If you have enough cash to pay cash, you might be better off paying cash - the interest on the loan might be more than the income earned on your cash.

    1. joeh | Sep 17, 2007 02:22am | #24

      I could pay cash, but would rather have some in stock for the next idiot idea that comes by.

      I know the interest earned won't cover the interest paid, but would still rather have some immediately available $.

      You never know what's out there til it knocks.

      Joe H

      1. mike_maines | Sep 17, 2007 02:32am | #25

        Liquidity is your friend.

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