All Forum Posts by: Michael Plaks

This is a rather diplomatic statement, Sean  ;) 

I think @Patrick Roberts hit the nail on its head. Which of the two scenarios are we talking about: Subject-to or Owner-financed wrap? 

A. Subject-to. In this arrangement, the buyer signs a contract where one of the clauses specifically says that he assumes responsibility for the loan which remains under the seller's name. This contract (as far as I understand, albeit I'm not an attorney) transfers the legal responsibility to the buyer, and then my answer on tax consequences stands: interest deduction belongs to the buyer.

B. Wrap. In this case, the buyer does not pay the loan directly. He pays seller's note ("outside" loan), and then the seller turns around and pays his loan ("inside" loan). In this case, the seller is still responsible for his original loan, and then Ashish's answer is correct: interest deduction belongs to the seller.

Once I re-read the original post by Anirudh, I realized that he left both interpretations possible. But based on him saying that the loan is "being paid off every month by my buyer" it seems that we're dealing with A, subject-to.

We need clarity, Anirudh. 

I disagree. The purchase contract makes the buyer legally responsible for the loan. Hence the buyer is the only one eligible to deduct the interest.

No, channeling it through a partnership will not change your tax situation at all. It will only create unnecessary hassle and cost.

No, you cannot. REPS applies to a person, not to a business. Each person has to qualify separately.  

I'm hesitant to argue with your "associate" because who am I? He is a trusted associate, and I am merely a tax professional you never met. But I will take my chances. YOLO

General principle of taxation: to take a deduction, you must
A. be legally response for this payment and 
B. actually make the payment

The conclusion should be obvious. The buyer is entitled to the deduction from August forward, and you are not.

@JD Martin's argument that the loan is under your name does not change my answer. While the loan is indeed under your name, the contract between you and the buyer legally transferred the responsibility for that loan from you to him. You're no longer responsible for the loan payments and no longer entitled to the deduction.

You're in luck! It's a perfect excuse to divorce her before too late.  :)   Just kidding of course.

Call the IRS business line 800-829-4933, put it on speaker and do something while holding for an hour. When they pick up, explain that you meant for your LLC to be a disregarded entity and you HAVE NOT filed any tax returns yet. Skip the gf->wife part, it is now irrelevant, just say "with my wife." And congrats on your marriage.

It would "help" you spend a lot more money and time on the setup and maintenance, while resulting in increasing your tax burden. Never put rentals in an S-corp. An S-corp will only make it worse.

I see that you are (understandably) searching for a way to somehow turn a No into a Yes. Such magic does not exist, unfortunately. Don't you think we would have already suggested an S-corp if it was a workable solution? 

No workarounds other than pursuing different business directions: STRs, realtor, certain Oil&Gas investments and so on. As long as you stay with long-term rental properties only, your hands are tied tax-wise. You can generate more deductions via cost segregation and other trendy strategies, but these extra deductions will be locked up.

Now, there're also strategies that involve constantly churning your rental portfolio and implementing 1031 exchanges in the process. It is complicated, time-consuming, expensive and offers limited tax relief. But it is possible with professional help, which is also expensive by the way. You would switch from a passive owner of two cash-flowing rentals into an actively involved investor working on finding new properties and executing exchanges, obtaining financing for them etc. And most importantly, it can be an undesirable tradeoff between tax savings and wealth building. What I mean is that with such a strategy you're giving up properties that you may be better off holding onto. In my book, it also goes under the "different business direction" chapter.

@Guy Injayan

Sorry about your CPA's situation.

Here is how to find another one:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...