All Forum Posts by: Paul C.

Thanks for the quick response, Nathaniel!

If I take out a loan to fund an investment in a notes fund, is the interest paid on the loan "investment interest" that goes on Schedule A or "passive interest" that goes on Schedule E?

I found the following in "The CPA Journal":

IRC section 163(d)(3)(A) defines investment interest as interest that is paid or accrued on indebtedness properly allocable  to property held for investment. It does not include qualified residence  interest or interest incurred in connection with a passive activity. Property  held for investment is any property that produces portfolio income such as  interest, dividends, annuities, or royalties not derived in the ordinary course  of a trade or business. It also includes an interest held by a taxpayer in a  trade or business that is not a passive activity and in which the taxpayer does  not materially participate.

Based on the above, I think the interest would be classified as Investment Interest and go on Schedule A since the notes fund produces interest income.  However, the part that's confusing me is where it says, "Property held for investment is any property that produces portfolio income such as interest...NOT derived in the ordinary course of a trade or business."

Is the notes fund deriving interest in the ordinary course of a business?

Perhaps tax experts like @Amanda Han  or @Steven Hamilton II  could chime in.

Thanks in advance!

@Nat C. How did everything go?  Hope it wasn't as bad as the PM made it sound.

Thanks Steven Hamilton II It is a continuous line of credit that would be used to buy stocks, private partnerships and properties. Since only a portion of the line would be used to buy properties (possibly multiple), would I just amortize all of the loan origination costs on the first property I buy with the line?

Perhaps one of these experts can opine: @Amanda Han 

 or @Steven Hamilton II 

Thanks!

Does anyone know how you would deduct the costs of obtaining a line of credit?  For example, let's say I get a line of credit and I pay the following fees:

Attorney Fees: $500

Origination Fees: $750

Title Fees: $1,500

Could any of these fees be either deducted or capitalized when they're not associated with a specific rental property?  If so, what would be the proper way to do it?

Thanks in advance.

@Cynthia Scott .  Is the idea to have the alarm to protect your property since it's vacant or to make it market better when you try to sell it?

After one of our vacant rental properties was broken into, we bought a SimpliSafe system.  It's easy to install and I can move it as properties become vacant.  The monitoring features were good and only cost $35 / month with no long-term contract.

I personally would not install a system that required a 1 or 2-year contract because I'm not sure what happens with the contract when the house changes hands.

I think his article is exagerrating the potential effects of tapering and the elimination of Fannie Freddie.

1.  Yes, the Fed is tapering and they're already most of the way through with tapering.  They're currently only buying 1.8 billion mortgage / day.  The funny thing is, as the Fed has reduced their purchases, mortgage prices have actually gone up relative to other rate instruments.  So thus far, the opposite effect of what one would assume has been happening.

Even when the Fed is completely done with QE, there are banks, money managers and hedge funds who will continue to invest in mortgages.  And for now, the Fed will continue to reinvest their paydowns back into mortgages.

2.  The elimination of Fannie and Freddie will take years, if it ever happens.  The leading legislation for making it happen is the Crapo-Johnson bill, but the imlementation allows for 5-years with possible extensions.

The article makes for an interesting headline, but I think the predictive value is minimal.

Thanks @Wilson Churchill and @Account Closed 

I didn't realize that the instructions for Schedule A, Line 14 state that investment interest does not include any interest allocable to passive activities.  That makes it pretty straightforward.  Schedule E it is.

Btw, I believe interest expense is one investment related expenses that is not subject to the 2% AGI floor.

Wondering if someone knows the answer to these tax questions... perhaps @Steven Hamilton II ?

If you use a line of credit to finance the purchase of a rental property (not a HELOC), I know the interest is tax deductible. My question is, do you have to deduct the interest on Schedule E against the specific property the funds were used to purchase? Or, can you deduct the interest on Schedule A as investment interest?

If both are possible options, what are the pros and cons?  It seems to me that putting it on Schedule A would be preferable as it could potentially offset some interest income from non-rental property investments.  If it goes on the Schedule E and there's already a tax loss from depreciation, then the interest deduction would not result in a lower tax bill, but simply get carried forward to offset future rental income.  Am I thinking about this right?

Thanks