All Forum Posts by: Natalie Kolodij

@Kaaren Hall with U Direct is also another great choice. 

She's been on the Tax Panel at BPCon with me for the past few years. She also just wrote a book for BP as well 

https://store.biggerpockets.com/products/self-directed-ira-i...

DIY online cost segs that are <$1k are being tossed out in audit like yesterday's garbage lately. 

These are the ones where you just enter some information about the property into a website and it gives you a report. 

At this point regardless of price point a cost segregation should be a full engineered study through a reputable firm. 

 As you mentioned intentional flips are typically considered inventory-

This means the income is ordinary income and as such: 

- Is not a capital gain, so hold time of 1 year does not change to a better long-term capital gain rate 

- Can not be invested in a QOF

Deductions related to it can't be pushed or changed- all costs are accounted for with the inventory component 

You can't directly do something to allow you to sell the flip, and buy the triplex without paying gains. 

If you held the flip for 2 years then sold- then you could potentially do a 1031. 

Do you know your actual amount of taxable profit on the flip? How much are you selling it for, how much selling expenses, how much was rehab cost & holding costs and how much was the property originally? 

There are multiple potential strategies it's just really going to depend on your personal situation. 

When it's sold it will be taxed as capital gains tax and may also have some unrecaptured depreciation which is capped at 25% and  recaptured depreciation as well which can be up to your ordinary income tax rate. (And then any state implications)

Given this isn't pennies we're talking about- working with a qualified professional to help mitigate the tax would be your best bet. 

 I  have a detailed reply above that explains it and provides the code citation to read as well

 Hi Rick, 

Correct! If it was fully financed on the original purchase it would qualify as replacement debt and be deductible. 

Hi Rick, 

First of all- congrats on diving in and your BRRRR deal going well!

Loan interest is deductible based on it's use-not the asset securing it. 

Since the HELOC was used for a business use (renovating the rental) you can deduct the loan interest against that rental using the interest tracing rules found in §1.163-10T.

The funds should be cleanly traced ideally. Meaning they went into a standalone bank account (not mixed with your other personal funds). 

When you refinance unfortunately all of the interest on that new loan will not be deductible. Again- loan deductibility is based on the use of funds, not the asset. So just because it's a loan on a rental property doesn't necessarily mean the interest will be deductible. 

There are types of deductible debt: 

- Acquisition debt (a loan to directly acquire an asset)

-Renovation loan (loan against an asset, used to renovate that asset)

-Replacement debt (a loan which is a refinanced replacement of an initial qualifying replacement). 

When you refinance- $70k of your new loan will qualify as replacement debt. (replacing the original HELOC debt)

However whether the interest for the  additional $200kish of loan  will be deductible will depend on 2 things: 

-How were the renovations paid for? If those were also initially funded with debt like a HELOC, then it would also qualify as replacement debt. 

- If you just personally paid for the renovations then the interest won't be deductible because "paying yourself back" doesn't qualify. 

And then there's any cash-out component. 

So if yo had $70k of initial purchase debt, for example spent $100k on renovations- and now you get a loan for $200k....$100k can potentially be deducted as replacement debt. 

But that extra $100k beyond that....depends on what you used those funds for. 

If you used them to purchase another rental/ use for another business endeavor...the process starts over. You can trace the interest to that business use. 

If you use the extra $100k of cash you receive to just...live on, buy a jetski, take a trip to Disney, (any personal use) the interest for that portion of the loan will not be deductible. 


Things like this are why it's important to work with a professional who is well versed in real estate taxation because the "common/simple" strategies taught frequently like BRRR or house hacking actually get fairly complicated when it comes to handling it correctly.

 Yup! 

The rule is based on if it's "within the primary dwelling unit" of the taxpayer or not. 

So if you buy a 5 bedroom house and rent the spare 4 bedrooms = you can still sell tax-free under the 121 (you just pay back depreciation) 

If you buy a duplex and rent 1/2 and live in 1/2. Only your half of the gain qualifies. 

The possibilities are endless really. 

But tax wise just here to note if you buy a 4 unit as a primary when you go to sell (if you meet the requirements) only 1/4 of the gain could be excluded under the 121 primary home sale exclusion. (Many people just assume it'll be fully tax-free because they lived in it somewhere)