All Forum Posts by: Account Closed

Sorry @Michael Bettencourt, @Wayne Brooks is correct. IRS rules are pretty clear. There is no way to do what you're suggesting. 

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I like Wilmington as well, nice town... a long way from Alaska!

1031 exchange is for deferring capital gains, usually on investment properties, i.e. rental properties. It might be appropriate if you wanted to use the proceeds from the sale of the home to invest in a rental property. It wouldn't be correct if you want to buy another primary residence. 

For a 1031 exchange, you have to work with a Qualified Intermediary. The rules are strict and it's important to follow correctly.
@Dave Foster is a QI and can speak more to if a 1031 exchange is appropriate for you or not...

@Wade Stahle:

Identify the exact closing date of your initial purchase - should be on HUD-1 form, you should have it with your closing docs.

Identify the first date you can have the sale and enjoy the homeowners capital gains exclusion (ask your tax preparer - probably 2 years from closing of purchase). 

Have your listing agent specify closing cannot occur before that date. 

Easy solution, save a bunch in taxes. 

Good luck!

Sorry, the capital gains tax is not prorated. Keep in mind you only pay tax of Sale price - cost to sell (agents fees, etc) - adjusted cost basis. Adjusted cost basis is cost + eligible improvements. 

Capital gains tax rate for you will depend on your income. Might be 0% if you're poor, but more likely 15% or 20% depending on your income.

Of course, I'm not a CPA or tax preparer, but I think that's about right.

If you can delay the sale somehow those two months, so that it's your primary residence for 2 years, you should qualify for the homeowners exclusion.

I hope that helps,

Good luck.

@Qwesi McCray, (and whoever else might this helpful):

I've used @Joe Villeneuve's 1st listed strategy for buy&hold investing since ~2009. I've never considered it "no money down" investing though. I consider it investing with "borrowed money". It's "non-lienable debt" as Joe calls it, but I pay back my debts no matter what, so I will take the losses if something goes south.

I first refinanced the mortgage of my primary residence to take out what little equity there was for some seed capital. I then primarily used 0% credit cards, occasionally supplemented with small personal loans from family. 

My strategy was to buy bank owned foreclosures with cash - fixers that wouldn't qualify for most mortgages. I then rehab, and put a tenant in place with 1-yr lease. With the lease, I can use the anticipated rental income to help qualify for the cash-out refinance or ELOC secured by the newly rehabbed property. Use the cash for the mortgage or ELOC to juggle debt if needed and then repeat the process.

Investment property ELOCs have no seasoning requirement, so as soon as it's inhabitable and you can qualify for the loan, you can get some cash out. For cash-out mortgages, you usually have to have owned the property for 6-12 months. Sometimes you can't get 100% of what you invested out of a property, but you'll have the rental income each month.

I've only used residential loans so far. Investors can get up to 4 Fannie loans, then 6 Freddie loans. ELOC limits I'm not sure about, but may be limited to a total of the first 4 projects. After that, you're looking at commercial lending.

On a few I didn't take cash out and just used the rent to pay down the debt.   

Using 0% credit cards is an entire topic unto itself. Between my fiance and I we now have at least 25 credit cards. I have a spreadsheet to keep track of balances, due dates, expiration of 0% offers, etc. Usually about half of them have some sort of 0% offer going on. Fee to utilize the 0% offer for 12-21 months varies from 2%-5%. Since 2009 I've usually had at least $50k+ in credit card debt at any point in time, usually all at 0%. At the peak, I had over $120k in 0% credit card debt. I went too far though, pushing my utilization to close to 90%, and had adverse actions taken by many card companies. Some closed accounts on me, others lowered my credit line. I've learned to show some restraint since then...

If you decide to persue 0% credit cards, don't just start applying for cards left and right. In 2009 I used the AOR (app-o-rama) strategy to acquire a handful at once. Card companies are hip to that now though, so better now I think to just apply for a new card every ~6 months. Those inquiries have a small impact on your FICO, and mortgage/ELOC lenders will ask about the inquiries. Not a big deal, but keep that in mind.

The most useful 3 cards for 0% offers I've found to be, in this order:

Chase (I have 3 Chase cards)

Citibank Diamond

Discover

All 3 seem to constantly mail me new 0% offers...

Capital One doesn't have offers as often but is also helpful.

I hope that helps.

Good luck!

@Brandon Hall, if the excess funds were deposited in a segregated account, and then used to pay ongoing expenses for the property, or later capital improvements on the property, would it then be correct to deduct the interest on schedule E for the property?
If so, are there any expenses that wouldn't qualify? mortgage or loan payments for example? is there a time limit for using the funds? For example if the funds were earmarked for improvements next time it was vacant?
Thanks!

@Will Johnston, I had the same question and would be interested in hearing from a CPA or accountant on this topic.

I assume you'd like to use the funds such that you can correctly deduct all the interest on Schedule E, for that particular property, while abiding IRS rules.

I believe paying down any debt used the purchase or rehab the property should qualify if done correctly. I believe if you use the funds for something other than expenses for that particular property, they are not deductible on schedule E for that property. (If you invest the funds elsewhere, they might be deductible elsewhere but not on schedule E for that property)    

My thought was to deposit the funds directly into a segregated account and then use the funds to pay any and every qualifying expense associated with the property until the account is depleted - possibly including loan payments, taxes, insurance, utilities, management. Income from the property I'd just deposit into a regular account, and keep out of the segregated account. I'm not sure if there's a problem with that approach and would like to hear other opinions. 

@Brie Schmidt: I'm not a CPA, but I've done my own taxes for years now. My reading of the IRS publications for Schedule E & interest deduction indicates that it's not correct to deduct 100% regardless of how you use the funds. IRS specifically states how you use the funds matters. 

IRS instructions for Schedule E, lines 12 and 13 states: 

In most cases, to determine the interest expense allocable to your rental activities, you must have records to show how the proceeds of each debt were used. Specific tracing rules apply for allocating debt proceeds and repayment. See Pub. 535 for details.

IRS Publication 535 states:

The rules for deducting interest vary, depending

on whether the loan proceeds are used for business,

personal, or investment activities. If you

use the proceeds of a loan for more than one

type of expense, you must allocate the interest

based on the use of the loan's proceeds.

To keep accounting, bookkeeping, and taxes as tidy & simple as possible, we want to keep the borrowed funds associated with the property, keeping funds segregated if possible, being conscience of IRS tracing rules.

I hope that helps. I'd like to hear more knowledgeable comments on this topic.

Hi & welcome! 
Feel free to contact me if you need contacts in the Wilmington area.

Welcome & congratulations. Your first purchase sounds like a great one.