All Forum Posts by: Account Closed

In your case, with a relatively low purchase price of $225k and substantial renovation work done, a cost segregation study could still be beneficial. Here are some points to consider:

1. Renovation Costs: Even if you did the work yourselves, you can typically include the cost of materials and any contractors you hired in the renovation costs. However, the value of your labor generally cannot be included in the cost basis for depreciation purposes.
2. Accelerated Depreciation: A cost segregation study would identify components of your property that can be depreciated over shorter periods, such as personal property and land improvements. This can result in higher depreciation deductions in the earlier years of ownership, providing tax savings.
3. Tax Situation: Consider your tax bracket and the impact of increased depreciation deductions on your tax liability. If you're in a higher tax bracket and expect to benefit from the additional deductions, a cost segregation study could be more advantageous.
4. Professional Assistance: While online calculators can provide estimates, they may not capture all the nuances of your specific property and tax situation. Working with a qualified cost segregation specialist or tax professional can ensure that you maximize the benefits and comply with IRS guidelines.
5. ROI Analysis: Evaluate the potential cost of the cost segregation study against the expected tax savings over time. If the projected tax savings outweigh the cost of the study within a reasonable timeframe, it may be worth pursuing.

Given your qualifications and involvement in the property, you likely have a good understanding of its components and renovation costs, which can facilitate the cost segregation process. However, consulting with a tax professional or cost segregation specialist can provide personalized advice and help you determine if a cost segregation study is worthwhile in your specific circumstances.

1. Selling the rental property within the next three years to avoid capital gains tax could be a viable option if you're concerned about tax implications and don't see significant benefits from holding onto the property. However, it's essential to consider other factors such as the potential for future appreciation, rental income, and overall investment goals. Regarding the $26K in rental losses, if you sell the property without utilizing those losses against other income, they could indeed go unused, resulting in no tax benefit. In this case, it's essential to weigh the potential tax consequences against the overall financial picture and your investment objectives.
2. If you decide to sell the current rental property and invest in another rental property down the road, you can potentially utilize the losses from the first property against income from the new property. Rental property losses can typically be used to offset rental income from other properties, including depreciation expenses. However, it's crucial to comply with IRS rules and limitations regarding passive activity losses, which can affect your ability to deduct rental losses against other income. Again, consulting with a tax professional can help you navigate these rules and optimize your tax strategy.

Ultimately, the decision to sell your rental property should consider various factors beyond just tax implications, such as your long-term financial goals, cash flow needs, and overall investment strategy. Working with a professional can help you make informed decisions that align with your objectives and maximize your financial outcomes.

1. Regarding the taxation of proceeds (fees and interest payments) earned within a Roth Self-Directed IRA (SDIRA) account: Typically, earnings within a Roth IRA, including interest and gains from investments, are tax-free as long as certain conditions are met. Since the SDIRA would be the lender in this scenario, the fees and interest payments earned would likely be tax-free within the IRA. However, it's essential to confirm this with a tax advisor to ensure compliance with IRS rules and regulations.
2. As for using the proceeds personally: Roth IRA contributions can be withdrawn at any time without taxes or penalties since these contributions are made with after-tax dollars. However, withdrawing earnings (such as interest payments and gains) may be subject to taxes and penalties if withdrawn before reaching age 59½ and meeting certain other criteria, unless an exception applies. There is also a 5-year rule for Roth IRA conversions, where converted amounts must remain in the Roth IRA for at least five years to avoid penalties on earnings. Again, it's crucial to consult with a financial advisor or tax professional to understand the specific rules and implications of withdrawing funds from a Roth IRA, especially within the context of a SDIRA and any conversions involved.

In summary, while the strategy of using a SDIRA to lend funds for real estate investments can offer potential tax advantages, it's essential to fully understand the tax implications, including the taxation of earnings and any restrictions on withdrawing funds, before proceeding. Consulting with a qualified professional can help ensure that you make informed decisions aligned with your financial goals and retirement plans.

Congratulations on your new ventures in real estate investing! 

Let's address your questions:

Question #1: Setting up an LLC for your real estate rental business is a prudent step for liability protection and organization. Even if you don't immediately transfer your properties into the LLC, having the LLC established can still provide benefits such as separating your personal assets from your business assets, potential tax advantages, and a more professional image for your business. So yes, creating the LLC for your business is a good idea even if you don't immediately transfer properties into it.

Question #2: Transferring your properties into an LLC does offer liability protection, which can be crucial in the event of legal issues. However, you're correct that there are potential disadvantages, such as limitations on financing options. Some lenders may be reluctant to extend mortgages to an LLC, or the terms might be less favorable compared to individual ownership. Additionally, as you mentioned, doing a cash-out refinance might be more challenging with properties owned by an LLC.

It's essential to weigh the pros and cons carefully and consider your long-term goals for your real estate portfolio. You might want to consult with a real estate attorney or financial advisor who can provide personalized advice based on your specific situation and objectives.

Overall, while there are advantages to holding properties in an LLC, there are also considerations to take into account regarding financing and other factors. Make sure to do thorough research and seek professional guidance to make informed decisions that align with your goals and risk tolerance.

Joe -

You are correct. Let me clarify:

In this scenario, since the individual mortgage on the unit was originated before 2017 and the owner's share of the underlying co-op mortgage's principal balance allocated to the specific unit is below $750,000, all interest payments made by the owner would indeed be fully deductible.

So, to reiterate, both the interest paid on the individual mortgage and the owner's share of the interest on the underlying co-op mortgage would be fully deductible without any limitation in this case.

Thanks.

Joe -

You're raising a valid point regarding the distinction between the two mortgages and their respective origination dates. Let's clarify the reasons behind the $750,000 cap on mortgage interest deductions and how it applies in this scenario.

1. Origination Date: As you correctly mentioned, the individual mortgage on the unit originated before 2017, while the underlying mortgage originated in 2021. The $750,000 cap on mortgage interest deductions applies to new loans taken out after December 15, 2017. Loans taken out before this date are generally grandfathered in and not subject to the limitation.
2. Purpose of the Limitation: The $750,000 cap was implemented as part of the Tax Cuts and Jobs Act (TCJA) primarily to limit the deductibility of mortgage interest on newly originated loans and to simplify the tax code. The intention was to reduce the overall federal tax subsidies for homeownership.

Given these points, let's revisit how the $750,000 cap applies in this scenario:

• Individual Mortgage: Since the individual mortgage on the unit was originated before 2017, it would not be subject to the $750,000 cap. The interest paid on this mortgage would be fully deductible without any limitation.
• Underlying Mortgage: The underlying mortgage, originated in 2021, would fall under the $750,000 cap because it's a new loan taken out after December 15, 2017. Therefore, the owner's share of the interest on this mortgage would be subject to the limitation.

Given this analysis, the owner's deductible interest would include the full interest paid on the individual mortgage and the portion of interest paid on the underlying mortgage that falls within the $750,000 cap.

In summary, while the individual mortgage isn't subject to the $750,000 cap, the portion of interest paid on the underlying mortgage that exceeds the cap wouldn't be deductible.

Apologies for the oversight. Let's correct the calculation considering the total interest paid on both the individual mortgage and the owner's share of the underlying mortgage:

($750,000 / $1,000,000) * ($40,000 + $5,000) = $33,750

So, you are correct. The deduction for mortgage interest in this case would indeed be $33,750.

Regarding your second question about the origination years of the mortgages, the limitation on mortgage interest deductions generally applies to new loans taken out after December 15, 2017, for both single filers and married couples filing jointly. The individual mortgage on the unit originated before 2017, while the underlying mortgage originated in 2021.

In this case, the origination year of the individual mortgage wouldn't affect the $750,000 cap on interest deduction because it's grandfathered in. However, the underlying mortgage originated after the cutoff date, so it would be subject to the limitation.

Therefore, the $750,000 cap would still apply to the total mortgage debt owed, which includes both the individual mortgage and the owner's share of the underlying mortgage.

For the purposes of calculating the limited interest deduction, the total mortgage debt owed would include both the individual mortgage on Unit A and the owner's share of the underlying mortgage.

So, the total mortgage debt owed would be $800,000 (individual mortgage) + $200,000 (owner's share of underlying mortgage) = $1,000,000.

Therefore, the owner would be limited to deducting mortgage interest based on this total mortgage debt of $1,000,000, not just the individual mortgage.

Thus, the deduction for mortgage interest would be calculated as:

($750,000 / $1,000,000) * $40,000 = $30,000

Therefore, in this scenario, the owner would be able to deduct $30,000 of mortgage interest for federal income tax purposes.

The tax treatment of your land sales would typically be determined based on when each parcel was sold and whether they were held for investment or business purposes. Here's a general guideline:

1. Capital Gains: If you held the parcels for investment purposes (i.e., not as part of a business activity), the gains from the sale of each parcel would generally be treated as capital gains. Capital gains are typically reported in the year the sale occurred.
2. Holding Period: Since you sold the first parcel in 2022 and the second parcel in 2023, you would report the gain from the sale of the first parcel on your 2022 taxes and the gain from the sale of the second parcel on your 2023 taxes.
3. Cost Basis: The cost basis for each parcel would be the portion of the total purchase price allocated to each parcel. In this case, since you subdivided the land into two parcels, you would allocate half of the total cost to each parcel. Any additional expenses incurred in preparing the land for sale (such as adding driveways) would also be included in the cost basis.

In summary, you would typically report the capital gain from the sale of each parcel in the year the sale occurred, based on the cost basis allocated to each parcel.

If you didn't report your expenses for furnishing, repair, and renovation on your 2023 tax return, you may still be able to claim those expenses in the future when you generate rental income from your property.

When you do start earning rental income and need to report it on your tax return, you can deduct eligible expenses associated with renting out your property, including the costs of furnishing, repair, and renovation. These expenses would be reported on Schedule E (Supplemental Income and Loss) of your tax return.

Since you incurred these expenses before you started renting out your property, you can typically depreciate the cost of the furnishings and any improvements made to the property over their useful life. You'll need to determine the depreciation schedule based on the type of property and the IRS guidelines. For example, residential rental property is typically depreciated over 27.5 years.

Keep thorough records of all expenses related to your rental property, including receipts and invoices for furnishing, repairs, and renovations. When you begin reporting rental income on your tax return, you can consult with a tax professional or use tax preparation software to ensure you're correctly claiming all eligible deductions and depreciating the expenses appropriately.