All Forum Posts by: Max Smetiouk

On a town house, I'd rather have good insurance than an LLC!

If you have a mortgage, most mortgages require you to have insurance.  You may be in violation of a loan covenant.

If you have no mortgage, you are a bigger target for a frivolous lawsuit. Insurance would cover legal costs. If you have no insurance, your LLC would have to pay for the legal defense. So, if you don't mind losing everything the LLC owns, sure, save the cost of insurance.

I'm assuming you've been managing your LLC properly. If you haven't followed solid corporate practices, the lawyers get to go after your other assets too. In other words, you may have zero protection whatsoever.

Quote from @Max Smetiouk:

Quote from @Kory Reynolds:

If you are using the HELOC proceeds to acquire land for a property that will be business use in some manner (a rental), then that interest expense from the HELOC would be deductible against that business project. I'll stay out of the weeds of dealing with potentially capitalizing that interest expense to the land while something is actually constructed.

If the HELOC is being used to acquire land for a property that will be personal use, you are out of luck. Mortgage interest is (potentially) deductible as an itemized deduction on Schedule A only if it is secured by that given property. So if the HELOC is in no way secured by this second property, it isn't deductible mortgage interest. If you took out a separate loan secured by the second property, and that will be used as a second residence, then it is potentially deductible - subject to all of the other limitations of personal mortgage interest like the $750k balance cap.

 Thank you Korey,

it does leave some options. In order to show land is acquired using Heloc from primary residence, does it need to be in LLC or other legal structure?

No, just document what happened and how the proceeds are used over time. An LLC provides no credence to a given tax position - it is primarily just a means of legal liability protection.

If you are using the HELOC proceeds to acquire land for a property that will be business use in some manner (a rental), then that interest expense from the HELOC would be deductible against that business project. I'll stay out of the weeds of dealing with potentially capitalizing that interest expense to the land while something is actually constructed.

If the HELOC is being used to acquire land for a property that will be personal use, you are out of luck. Mortgage interest is (potentially) deductible as an itemized deduction on Schedule A only if it is secured by that given property. So if the HELOC is in no way secured by this second property, it isn't deductible mortgage interest. If you took out a separate loan secured by the second property, and that will be used as a second residence, then it is potentially deductible - subject to all of the other limitations of personal mortgage interest like the $750k balance cap.

After a brief search, the IRS says-

For tax years 2018 through 2025, if home equity loans or lines of credit
secured by your main home or second home are used to buy, build, or
substantially improve the residence, interest you pay on the borrowed
funds is classified as home acquisition debt and may be deductible,
subject to certain dollar limitations. However, interest on the same
debt used to pay personal living expenses, such as credit card debts, is
not deductible.

But, wait there's more... The IRS also says “you can choose to treat any debt secured by your qualified home as not secured by the home.”

So... this leads to interest tracing rules which are not complicated but it begs more questions-

What's the land for? Are you building a house or putting in a mobile home park?

I'm so sorry to hear you've had such a rough go of it Fran. To be honest, I had a rough go of it as well when I was buying rental properties.
Eventually I got rid of all my rentals and switched to passive real estate investing. I own a fractional interest in over 2,500 units today, and I don't have to hassle with tenants or lenders or inspectors or insurance or contractors or property managers. I just wire in the money and sit back to enjoy the cash flow, appreciation, and tax benefits.
If you love the idea of a real estate side hustle and being a landlord, then I would never discourage you. But if you just want the investment benefits of real estate, consider joining an investment club that goes in on real estate syndications together. That's how I invest every month, with relatively small amounts.

@John Malone are you a tax attorney? Do you have any experience with construction of a STVR as it relates to claiming material participation while acting as co project manager?