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How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 12:49 pm
by Rotarman
I have a soon to be rental property that was previously our primary home. Mortgage is 800 and rents for 1200. I'm married and we should be under 100k MAGI, but unfortunately (or fortunately) I have been unable to get the house to show a paper loss. The house has appreciated about 30+k since buying and we've paid off around 20k by accelerating payment when it was our primary. Essentially I can write off $600 of mortgage and ~$300 depreciation per month = 900 which is still a far way from 1200. No property manager and minimal repairs insofar so no other significant expenses. What I wish I could do is go back in time and not accelerate mortgage payments to at least give another 100 or so a month interest deduction. I'll still be primary occupant for another few weeks, could I pull a HELOC or something during that time and deduct the interest or would the money still have to be used on improvements to make it deductible?

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 1:26 pm
by unclescrooge
Did you include property taxes in your costs?

Also, with the QBI deduction, the first 20% of income might be tax free. I don't think the tax hit will be too bad.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 1:55 pm
by fabdog
You must use the loan for your rental to deduct the interest. Even if secured by the rental, if the proceeds are not used on the rental, then deduction not allowed

Mike

From Pub 535

The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds.

Secured loan. The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan.

Example. You secure a loan with property used in your business. You use the loan proceeds to buy an automobile for personal use. You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 1:56 pm
by fabdog
and in addition to property taxes, are you carrying insurance on the rental? That's deductible as well.

anything else like pest control, lawn service, etc?

Mike

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 2:03 pm
by JGoneRiding
I think come tax time you will find you have more deductions than you think. No need to invent them. A slight profit is a good thing with the tax law changes.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 2:04 pm
by YttriumNitrate
The de minimis safe harbor election threshold for what can be expensed is pretty high. ~$2500 from what I recall. Consider doing some improvements under this threshold so you can raise the rent. Of course, that will make showing a loss in the future even harder. :twisted:

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 2:08 pm
by sk.dolcevita
I really struggled with utilizing the 20% QBI deduction this year. I have only one rental property and it is occupied with no-trouble tenants. Also, the property is in good shape and my involvement is largely confined to receiving timely rents electronically. There was no way I could claim that I have 250 hours of time invested in my rental (250 hours is the safe harbor stipulation). So I didn't taken the deduction and was quite ticked off. QBI favors those having large rental portfolios, especially those with troublesome tenants or those requiring significant ongoing upkeep.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 2:24 pm
by unclescrooge
sk.dolcevita wrote:
Sat May 04, 2019 2:08 pm
I really struggled with utilizing the 20% QBI deduction this year. I have only one rental property and it is occupied with no-trouble tenants. Also, the property is in good shape and my involvement is largely confined to receiving timely rents electronically. There was no way I could claim that I have 250 hours of time invested in my rental (250 hours is the safe harbor stipulation). So I didn't taken the deduction and was quite ticked off. QBI favors those having large rental portfolios, especially those with troublesome tenants or those requiring significant ongoing upkeep.
I have 2 rental properties and I don't spend 250 hrs, nor do they provide 50% of income. Still Turbo tax was able to provide some QBI deductions for me.

Did you let software calculate QBI for you, or did you prepare your taxes manually?

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 3:27 pm
by DrGoogle2017
What about insurance and property tax?

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 3:31 pm
by Rotarman
fabdog wrote:
Sat May 04, 2019 1:55 pm
You must use the loan for your rental to deduct the interest. Even if secured by the rental, if the proceeds are not used on the rental, then deduction not allowed

Mike

From Pub 535

The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds.

Secured loan. The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan.

Example. You secure a loan with property used in your business. You use the loan proceeds to buy an automobile for personal use. You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property
I know I can't use that interest once it's a rental, I was wondering whether I could quickly take a loan while it's still my personal residence. It doesn't make sense to me that I could deduct say an 80% LTV loan but if I pay off 30% then take a HELOC for that 30% it's now not deductable. No one said the tax code was logical though :annoyed


fabdog wrote:
Sat May 04, 2019 1:56 pm
and in addition to property taxes, are you carrying insurance on the rental? That's deductible as well.

anything else like pest control, lawn service, etc?

Mike
The $600 of 800 mortgage includes insurance+taxes+interest. Tenant doing all lawn servicing, but I did deduct the $30 or so of mulch and whatnot I put down before their move-in.

unclescrooge wrote:
Sat May 04, 2019 2:24 pm
sk.dolcevita wrote:
Sat May 04, 2019 2:08 pm
I really struggled with utilizing the 20% QBI deduction this year. I have only one rental property and it is occupied with no-trouble tenants. Also, the property is in good shape and my involvement is largely confined to receiving timely rents electronically. There was no way I could claim that I have 250 hours of time invested in my rental (250 hours is the safe harbor stipulation). So I didn't taken the deduction and was quite ticked off. QBI favors those having large rental portfolios, especially those with troublesome tenants or those requiring significant ongoing upkeep.
I have 2 rental properties and I don't spend 250 hrs, nor do they provide 50% of income. Still Turbo tax was able to provide some QBI deductions for me.

Did you let software calculate QBI for you, or did you prepare your taxes manually?
I'm still confused by this 250 hour rule, and I spent some time a few weeks back looking into it. I concluded the 20% wasn't worth my time figuring out whether/how I could use it, but if TurboTax automatically calculates that I'm eligible I'll use it.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 4:06 pm
by bovineplane
If you have been a landlord previously you may already be familiar with this info.

While you live there, you treat the home like an owner and maintenance is low. When renters live there they treat it like a rental and seem to find ways to spend your money on maintenance.

Under ideal conditions you have described you will clear $300/month. You might be surprised how fast that disappears with unscheduled maintenance.

You are correct to assume economics of scale favor those with a larger rental holding. Good luck if this is your first. Sounds like you are starting from a good cash flow position. Bank the monthly proceeds of you don't need it for income and use it for expenses.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 5:31 pm
by fabdog
the 250 hours references the IRS "safe harbor" to claim residential real estate activities as a business for purposes of QBI. As noted tough to meet with one property and hassle free tenants

https://www.irs.gov/pub/irs-drop/n-19-07.pdf

Mike

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 5:51 pm
by JGoneRiding
fabdog wrote:
Sat May 04, 2019 5:31 pm
the 250 hours references the IRS "safe harbor" to claim residential real estate activities as a business for purposes of QBI. As noted tough to meet with one property and hassle free tenants

https://www.irs.gov/pub/irs-drop/n-19-07.pdf

Mike
I am curious as to how you beould ever show/proof it. I have never calculated hours spent on rentals or attempted to document it in any major. Varies a lot month to month.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sat May 04, 2019 7:20 pm
by sk.dolcevita
JGoneRiding wrote:
Sat May 04, 2019 5:51 pm
fabdog wrote:
Sat May 04, 2019 5:31 pm
the 250 hours references the IRS "safe harbor" to claim residential real estate activities as a business for purposes of QBI. As noted tough to meet with one property and hassle free tenants

https://www.irs.gov/pub/irs-drop/n-19-07.pdf

Mike
I am curious as to how you beould ever show/proof it. I have never calculated hours spent on rentals or attempted to document it in any major. Varies a lot month to month.
I used H&R Block. It basically lets me decide whether my rental activity is a qualified business or not. This, I think, is the correct approach as IRS has only vaguely defined what constitutes a qualified business. The onus is upon you to prove that it is so (as opposed to being an investment). IRS does offer a safe harbor - if you spend more than 250 hours on your rentals per year, you can claim the QBI deduction. Of course, you need to be able to defend that number if audited (the exception being 2018 whence IRS will accept whatever you say).

Note that not being able to use safe harbor does not mean you cannot take the QBI deduction. You can still do so but then you would have to justify your position in case of an audit. It seems the clarity on this issue will come only when someone is denied a claimed QBI deduction and goes to the tax court to get a ruling. In the meantime, for small time landlords like us, it is whatever we feel comfortable with. As for me, I am not a lucky person. So I decided not to claim the QBI deduction.

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sun May 05, 2019 6:24 am
by riverguy
"I'm making money on my rental, help me spend a dollar to save 30 cents"

Re: How to increase deductions on a rental property (HELOC?)

Posted: Sun May 05, 2019 11:47 am
by oldmotos
Don't forget to deduct any mileage for checking on the house, going to buy repair parts etc. At 58 cents a mile it adds up. Also consider deducting any tools you buy to work on the house.