Using Pre-Tax Rent To Paydown HELOC

[Anthony R.]

So it recently occurred to me that I might be setting myself up for failure. 

Earlier in the year, I bought a new building, but instead of traditional financing, this time I used my HELOC to purchase it.

The numbers are roughly as follows

Purchase price: 45000
Repairs: 20000

Total loaded onto HELOC ~65000

Now that all the repairs are done and it's fully rented, the plan is to use all rental income from this property and the other rentals in our portfolio to pay this HELOC down as fast as possible.

I'm also using a little of my earned income as well. Right now we're 2 payments in and looking at about 10 more payments. 

So my question is, am I setting myself up for a tax nightmare at the end of the year?

It occurred to me that the rent is pre-tax and this is a non-traditional loan, so I'm not sure what can be written off here, if anything. My fear is I end up owing a giant tax bill. 

[Natalie Kolodij]

I'm not sure why you think your rent is pretax. 

Whether you use the cash or not, it's taxable income. You're taxed on what you earn, not what cash is remaining at year end. 

IRS allows interest tracing. So since the HELOC was used to purchase a new rental, the interest on that loan gets deducted against the rental.

If you collect $40k in rents during the year 

And use $10k of it to pay down the HELOC

And then interest, taxes, repairs, depreciation for the year = $25k 

Your taxable income is 40k-25k. 

The fact that you put $10k of your cash flow toward the loan has 0 impact tax wise. Except that once the loan is paid off, you won't have an interest deduction.