All Forum Posts by: Josh Smith

Hi Michael, 

Thanks for your detailed reply. Both comments are also spot on.

One Q: My AGI is more than 200K and my Form 8582, Part III lists total allowed losses as 0. Does it still make sense to transfer the loss from Schedule E to 1040 through Schedule 1? Assume the property for 2022 was not mixed use. Schedule1, Line 5 instructions are not clear. 

Many thanks!

Title: Part rental: Mortgage interest+Property tax distribution between 1040-Schedule-A and Schedule E

I was doing a review of at my past tax returns which I have a tax firm file. For my part-owner-occupied-rental I see 2 different schemes being followed:

1) Mortgage interest+Property tax distribution between 1040-Schedule-A and Schedule E is as per the distribution of “Fair Rental days” vs “Personal use days” as mentioned in Schedule E. Say house was rented for 255 days and rest personal (70% house rented) then 70%:30% of property tax AND mortgage interest was allocated to Schedule E:Schedule A.

2) The “Fair Rental days” & “Personal use days” are blank in Schedule E and (say) 70%:30% of property tax was allocated to Schedule E:Schedule A but 30% :70% of mortgage interest was allocated to Schedule E:Schedule A.

Evidently Option #2 above is more tax advantageous (results in higher refund), but can it cause a problem with the tax man? I’ved used the same firm for years, but everytime it’s a different person.

Thanks!

Hi,

I find myself paying several (good) workers in cash and they won’t give me any receipts or won’t take a check. Many of them don’t speak English very well and are simple folks. Example gardner, handyman, cleaning folks. Should one include these cash expenses in their Schedule E..? What explanation can one give in case they get audited? I am talking about <$1000 expenses a year.

Hi,

Any thoughts on filing Form 2106 as part of California Form CA540 line 19 "Unreimbursed employee expenses" for WFH expenses? WFH means utilities, internet, phone which I use towards office work when working from home in my home office (separate room in my SFH). Reading the instructions for Form 2106 seems that one can only claim for things like overnight travel, but I have heard friends filing this form for WFH expenses (internet, phone, etc). Any thoughts?

Background: I have a full time job and only one SFH rental which I manage passively.

Thanks!

Hi,

I have a SFH1 (4bed/2bath) in which I live with my partner and kid and occupy fully. I also have another SFH2 (4bed/2bath) 20 miles away. In SFH2, I rent a couple of rooms out and keep the rest for my personal use. Personal use includes: storing of some family personal papers/records which I don’t want to keep at SFH1, sometimes I have a guest over who I don’t want to live with us, sometimes I need to sleep at SFH2 when I am working late at my job/taking a mental time out with my partner. Another reason is that renting only a couple rooms allows me access to SFH2 anytime I want vs renting it out fully means I don’t have as much access to the house, and I like the increased accessibility.

To put in perspective, both SFH1/SFH2 are ~1million houses in California.

1) Does this arrangement look odd from a tax perspective? Maybe the tax man will ask why do you need to part occupy another SFH2 house when you have spare bedrooms in your SFH1?

2) If its arrangement is ok, what would this SFH2 part-rental be called for tax purposes…would it be called a “second home”? I know it won’t be called a “vacation home”, as a “vacation home” needs to be at least 50 miles from your primary home.

3) Any tax (or otherwise) advantages/disadvantages of this SFH2 part-rental vs converting SFH2 into full rental (not occupying any of SFH2)?

Thanks!

Hi

I recently had my 2022 taxes prepared (not yet filed) from a firm and I noticed that they took line 26 of Schedule E “Total rental real estate and royalty income or (loss)”, which is say -$5,000 (notice the minus/negative) and placed that on Form 1040, Schedule 1, Part 1, Line 5 “Rental real estate, royalties, partnerships, S Corporations, trusts, etc. Attach Schedule E”. For what it’s worth, In form 1040, Schedule 1, Part 1 Line 1, I also had a state income tax refund of $3,000. So basically these two 1040 form 1 items, put together transferred a net negative $2,000 into my Form 1040 line 8 “Other income from Schedule 1, line 10”.

So basically I was able to transfer my passive rental loss of $5000 into my 1040…but I always thought 1040 and rental/passive were separate buckets? I have not sold the rental this year. This is not the first year, I have had this rental and in previous years filed tax returns, I have not done this transfer of passive Schedule E loss -> 1040. I asked the tax preparer why they have done so this year and they just said that the computer automatically figures this out..which I don’t understand. I have used the same firm since many years but the actual tax preparer changes every year.

Any thoughts?

Thanks!

Hi,

I applied for a refi on 8/1 and it closed on 9/1 as owner occupied 30 year fixed with Bank1. This has been my first house (its SFH) and I have lived continuously in it for 6 years.

I saw another house(also SFH), bid on it on 9/10 and offer got accepted on 9/12 and I am in contract. I approached bank2 for mortgage application for the new house. Both house1 and house2 are v similar in sq footage and floorplan. House 1 is 10% less in value than house2.

My mortgage guy for bank2 told me that bank2 can take issue with this recent refi, as I have not occupied the house for 12 months after the refi. He also said that it is not possible to skirt the issue, since I have credit hit from bank1 and in the credit system it shows recent payoff by bank1 to older bank. Note that I do need rental income from house1 in order to quality for house2 Debt to income.

He suggests rather than skirting the problem, be upfront, address the issue and present an explanation letter to the underwriter, even before the underwriter asks for it. So my questions:

• 1) Is this a good idea? Or should I first let the underwriter take issue and then provide him/her with an explanation letter?
• 2) What should I write in that explanation letter: I was thinking something like below: please help review on wordings I should and should not put on the letter.

Dear Underwriter.

XX Ave, XX city, XX state is my dream house and we would be thrilled to get a mortgage for the house. I was living in home1 for 6 years and was recently approached by a company which offered to slightly better our rate for no cost to us. However, my dream house listing in my dream neighborhood came up shortly afterwards and it makes a lot of sense for us to move there: it is closer to me and my wifes work, school district is better, its more upscale neighborhood to raise a family, crime is less. The new house has larger lot/yard, has updated kitchen and baths, has air conditioning, hardwood floors instead of carpet. The current house is very original and a starter home we bought.

House2 neighborhood is v expensive and houses there are usually outside our budget, but this one suddenly came available within our budget and we would love to be the new owners and raise our family there.

Best,

XX

Hi,

I want to get a 200K HELOC (pulled from my current owner occupied property) to use as down payment for a second primary house, which may be owner occupied primary or investment. I have 2 options:

1) Bank1: Prime – 0.25% so currently 3.0%. Pretty good IMHO. However, they only offer Principal + Interest and do not offer an interest only option. So the monthly payment is $842.

2) Bank2: Prime + 0.5% so currently 3.75%. However they are offering interest only HELOC. So the monthly payment comes out to be around $625.

Say the lifetime interest rate cap on both the options above is 15% (since prime is not fixed). My preference is to go for Bank1 since it is offering a lower interest rate and I intend to pay off the HELOC within 3years.

Now I want to be qualified for the maximum amount of mortgage possible for my new second home. For that, I know that I have to get my debt to income ratio as low as possible. So, my question is:

1) Will my debt be considered lower if I go with Bank2 due to lower monthly payment (even though I will be paying more total-lifetime interest)?

2) Will my debt towards the HELOC be considered at 3.0%/3.75% (current rate with bank1 or bank2) or 15% (which is the highest the HELOC's can goto)?

Thanks!