All Forum Posts by: Dave Toelkes

@Aviv Berkovitch

My understanding may be the same as the previous response, but I am not sure exactly what Stephanie said.

First, whether you can use projected rental income for a property you are planning to purchase is up to the investor that is purchasing your loan; some may allow, others won't. I could not tell from Stephanie's response whether she was including the property you are attempting to purchase in the DTI.

For the DTI calculation, using rental property you already own and have a rental history on your tax returns, my experience is that my net annual rental income from the tax return plus depreciation, plus mortgage interest is divided by 12, then PI is subrtacted. If the answer is positive, then that amount is added to my total income to calculate DTI. If the amount is negative, then that amount is added to my debt service to calculate DTI.

In the absence of a tax return, but with proof of ownership and a long term lease, the lender will use 75% of scheduled monthly rent and subtract HOA fees and monthly PITI. If the answer is positive then it is included in gross income, if negative it is included in debt service to calculate the DTI.

I admit it has been at least 13 years since I acquired my last rental property, so my understanding of the DTI calculation mechanism may be outdated. I disagree with your assertion that a positive cash flow from your first rental property does not change the DTI you had before you acquired the rental property.

You don't tell us why the rental property is a pain.  If you are managing the property yourself from a distance, you can eliminate that pain by hiring a licensed property management company.  Make all of your management problems someone else's challenges.  A property managment company in the area where your property is located is in the best position to give you accurate and timely market rental comps whenever you have a turnover, and deal with the advertising, property showings, and tenant screenings to include reference checks and employment verification.  Once a tenant is in place, the property manager probably has a network of contractors to call upon for any necessary repairs.  If the cash flow is good, and your compelling reason to sell is the pain of long-distance management, outsourcing property management may be your best solution for your capital gains tax issue.

If you are determined to sell (not exchange) the property and refuse to pay capital gains or depreciation recapture taxes, then you can only do that by selling at your current tax basis (book value).  If you bought for 170K, had about 5K in nondeductible closing costs and did about 15K to make the property ready to rent, then about 20K in depreciation over the past four years makes your tax basis about 170K.  Selling for 170K net after selling expenses will let you avoid all capital gains and depreciation recapture taxes, yet still give you about 55K cash tax-free at closing as a return of basis after you payoff your 115K mortgage balance.  Of course, you have to be willing to forfeit the potential profit you have from appreciation.  

Costs to make your investment property "rent ready" are added to the basis.  After the property is rent ready, repairs can be expensed even if you are between tenants.  For example, your tenant of several years moves out.  You advertise the property for rent, but do a complete interior painting during your vacancy period to make the property more attractive to a prospective tenant.  The painting is still a deductible expense as the property is continuously ready and available for rent.

Some high cost items are improvements even if a tenant is occupying the property.  Replacing the roof or HVAC system are improvements even if the property is tenant occupied at the time.  There are rules governing the extent of repairs than must be capitalized as improvements, as well as, improvements that can be deducted as an expense.  Your CPA can help you navigate the tax code if you are in doubt over whether to expense or depreciate.

@David Roe

Not sure I would characterize "no capital gain" as a benefit.  The wholesaler will have to pay ordinary income AND self-employment income taxes on his profit from the deal.  The total tax bite will be greater than capital gains taxes.

For your share of the participation, you are contribuing materials and sweat equity.  Chances are that neither are  deductible as a business expense for a property you own/co-own.  Consult with your own tax advisor on how your rehab work will be treated for tax purposes.  If it is an adjustment to basis, then you need to take all that cost as part of your cost basis in the deal.  This will certainly affect how much your partner should receive for the buy out.

@Alejandro Arreola

There are no deductible expenses here.  Everything you paid for the house, including the rehab/repair costs and property taxes, is included in the gift of equity you gave your parents.  

Just my 2¢.

@Chris Wilkening

You said you bought a turnkey rental but did not have a tenant in place until January.  

When did you purchase the property and was the property ready and available for rent on your first day of ownership?

If you purchased last year, and immediately began marketing the property for rental use, then the property was in service as a rental for a portion of the year last year. You do have deductible rental expenses for last year -- at the very least some depreciation expense - despite not having any rental income last year. You probably paid some deductible property taxes at settlement and purchased a rental dwelling insurance policy (the policy premium is deductible if paid last year). If the rental property ownership makes you a member of a home owner's association, then any HOA fees you paid or prepaid last year are also deductible.

I agree with the others who say TurboTax can do it for you -- but only to a point. I agree that TurboTax Premier can handle nearly all your rental property issues with their guided interview.  BUT, if you don't know enough to correctly answer the questions the guided interview will ask, then it is probably best if you get a tax professional to do it for you the first time, or the first couple of times.  

This is a hypotheticql scenario. The OP stated that title could be held either in LLC or jointly titled to each named owner.

The circumstances suggest that you bought out your partner's interest.  Whatever your partner received in excess of his capital contribution will be a taxable gain for your partner.  As the remaining owner, your portion of the cash out refi is tax free.   Your tax basis will be your initial capital contribution plus the amount you paid to buy out your partner. 

Commercial lending is not restricted to larger multiplex residential properties and commercial properties. You can get a commercial loan for a single family rental, too. No personal recourse. No restriction on how many financed properties you can have. The LTV requirements may be higher, the interest rate will be higher, and there will probably be a balloon in five years (which the lender can choose to extend for another five years if the property is cash flowing well enough).

If you are considering acquisiton of a tenant occupied property, and will inherit the tenants and their leases, then the lender may choose the take that into account, but they don't have to if their underwriting guidelines don't allow it.

Also not a CPA nor attorney.  In the scenario you describe, I beleive the child meets the USE and OWNERSHIP tests on 50% of the property, but the USE test only on the other 50% of the property.  The child would have to wait two more years to meet the ownership test on 100% of the property before qualifying for Sec 121 exclusion on the entire property.

Just how I see it.