Real Estate Tax Question


D

Dave Brandman

I purchased in August 2003 a house that will become my
permanent home in June 2004. The previous owner of the home
is renting the home back from me for 10 months while his own
new home is being built. He is paying market rates for the
rental.

I will have a net rental loss for both 2003 and for the
entire 10 month period, in particular because I paid 3.5
points (about $11,000) on the mortgage to buy down the rate
to 3%. Were it not for this expense, I would have a net
profit on the rental.

I am married, and gross family income is over $150K.

Is there any way I can preserve the full benefit of this
deduction.

Dave
 
Ad

Advertisements

G

Gene E. Utterback, EA

Dave Brandman said:
I purchased in August 2003 a house that will become my
permanent home in June 2004. The previous owner of the home
is renting the home back from me for 10 months while his own
new home is being built. He is paying market rates for the
rental.

I will have a net rental loss for both 2003 and for the
entire 10 month period, in particular because I paid 3.5
points (about $11,000) on the mortgage to buy down the rate
to 3%. Were it not for this expense, I would have a net
profit on the rental.

I am married, and gross family income is over $150K.

Is there any way I can preserve the full benefit of this
deduction.
I am not sure you are able to deduct the points you paid on
this property. The rules for deducting points are pretty
clear:
1 - The settlement statement must identify them;
2 - they must be computed as a percentage of the loan principal;
3 - they must not exceed the normal amount charged in the area;
4 - they must be paid from the buyer's funds;
6 - you must use the cash method of account on your tax return;
7 - they must be related to your principal residence.

I think the small hoop for you is #7. Since the property
will NOT be your principal residence at any time during 2003
I believe you are not eligible to deduct the points you paid
to purchase the property. You may be eligible to amortize
the points over the life of the loan and I certainly think
you could add the points to your cost basis of the property,
but I do not agree with a full deduction in 2003.

Had your use been split in 2003, I would have no problem
with the deduction of the points. The problem that I see is
that there was not only no personal use in 2003, but all the
use was business use.

The caveat here is that I have not fully researched this
issue.

Sorry, and good luck,
Gene E. Utterback, EA
 
A

A.G. Kalman

Dave said:
I purchased in August 2003 a house that will become my
permanent home in June 2004. The previous owner of the home
is renting the home back from me for 10 months while his own
new home is being built. He is paying market rates for the
rental.

I will have a net rental loss for both 2003 and for the
entire 10 month period, in particular because I paid 3.5
points (about $11,000) on the mortgage to buy down the rate
to 3%. Were it not for this expense, I would have a net
profit on the rental.

I am married, and gross family income is over $150K.

Is there any way I can preserve the full benefit of this
deduction.
It's not clear to me that the $11,000 is a deductible
expense. It would only be deductible if it were prepaid
interest paid to acquire your main home. You appear to be
treating this property not as a "not-for-profit" temporary
activity, but as a rental. In addition, even if it was your
main home, the points would have to be reasonable and
typical of what is going on in that area of the country. I
don't know if your buy down of the loan is typical or
atypical.

I have had experience with temporary rental activity of
buyers and owners. In each case the property was treated as
a not-for-profit activity that limited the deductions to no
more than the income received. No Schedule E was prepared.
The income was entered as Other Income and the expenses went
on the Schedule A where they would normally appear....
including the points paid to the lender to acquire the first
mortgage.
 
M

Mike Lewis

Dave Brandman said:
I purchased in August 2003 a house that will become my
permanent home in June 2004. The previous owner of the home
is renting the home back from me for 10 months while his own
new home is being built. He is paying market rates for the
rental.

I will have a net rental loss for both 2003 and for the
entire 10 month period, in particular because I paid 3.5
points (about $11,000) on the mortgage to buy down the rate
to 3%. Were it not for this expense, I would have a net
profit on the rental.

I am married, and gross family income is over $150K.

Is there any way I can preserve the full benefit of this
deduction.
From your facts, It is likely that you have a loss on
"active rental real estate", in which case you can deduct
such loss, up to $25,000 per year, from other income. I
would download Pub 527 to confirm that you did in fact
actively participate in renting the property, although its
hard, based on your comments, to think you didn't.

Mike Lewis, CPA
 
Ad

Advertisements

M

Michael T Wing CPA

A.G. Kalman said:
I have had experience with temporary rental activity of
buyers and owners. In each case the property was treated as
a not-for-profit activity that limited the deductions to no
more than the income received. No Schedule E was prepared.
The income was entered as Other Income and the expenses went
on the Schedule A where they would normally appear....
including the points paid to the lender to acquire the first
mortgage.
That is what I have done in similar situations. As a
clarification, I believe that the mortgage interest and real
estate taxes would normally be deductible IN FULL (no
limitations, "passive" or otherwise). Any OTHER deductions
would be limited to the excess of income over the interest
and tax deductions.

MTW
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top