All Forum Posts by: Rick Im

Hello Tony,

My initial reasoning was that, although the applicant claimed she planned to live with three other individuals with disabilities, she was unable to provide documentation to verify this. However, as you suggested, I’ve decided to err on the side of caution and look for a more straightforward tenant. I truly appreciate you taking the time to educate me on this matter.

Rick
 

I have a 4-bed, 3-bath single-family home available for rent. One prospective applicant is a professional caregiver responsible for three adults with intellectual disabilities. During the showing, she mentioned that her contract prohibits her from disclosing personal information about her clients, including their names and Social Security numbers.

I'm considering accepting her application but charging higher rent—for instance, an additional $200 per client—to account for the additional risk and lack of standard tenant screening information.

I'd appreciate input from the community on a few questions:

1. Fair Housing & Rent Adjustment: My understanding is that adjusting the rent in this case is not considered discriminatory, since the applicant cannot provide essential screening information and I would be assuming greater risk as a landlord. Is this interpretation correct?

2. Legal Risk & Liability: Since the three clients would not be listed on the lease, what legal risks or liabilities might I face if I allow them to reside in the home? Are there ways to mitigate these by adding special clause to the lease?

3. Tenant Selection Strategy: Would you proceed with this arrangement, or would you prefer to wait for a more conventional applicant to avoid the complexities?

Thanks in advance for your insights.

Rick

Quote from @Natalie Kolodij:

There's more to it than that. 

Non-qualified use is any time during the period the home wasn't used as your qualifying principle residence. If rental use occurs before a most recent period of qualifying use; it's typically non-qualified use. Non-qualified use time results in taxable gain when you sell; even if you've met the 2/5 year rule as well. 

One of the exceptions to non-qualified use is: Short Temporary absences. 

I inserted the code below which has examples as well. 

The examples show that: 

A 2 month temporary absence and renting during that time would be okay. 

But that a 1 year span of time away from the home would not qualifying as short-temporary absence. 

(As for any times longer than 2 months and less than a year; anyone's guess) 

So just hitting the minimum of 4.8 months per year to equate a total of 24 months won't work. 

If you were to leave each summer for 2-3 months and rent the property, you're likely okay and that won't work against you. 

If you rent it for a month while gone for winter break, you will likely also be okay. 

If you do both....now things are fuzzy. More answers may lie in some tax court cases; but there's no definitive hard line of when an absence stops being "short and temporary" and if there is a limitation on a number of "short temporary absences" 






https://www.law.cornell.edu/cfr/text/26/1.121-1

Natilie! Thank you so much for your invaluable input! 

I work in academia and have three months of summer break and one month of winter break. My wife and I are considering renting out our primary residence during this time while we live elsewhere or travel. To qualify for the capital gains tax exclusion, is there a limit on the number of days we can rent our home?

I found the following information on the IRS website:

I am in academia and have 3 months of summer break. Me an my wife are thinking about renting out our primary residence during time while living in other place or traveling. If we want to waive capital gains tax, is there a limit how many days I can rent?

I found the following information on IRB website:

Determine whether you meet the residence requirement.

If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

If you were ever away from home,

you need to determine whether that time counts toward your residence requirement. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).

Based on this guideline, my interpretation is that as long as I reside in my primary home for at least 4.8 months per year (since 24 months over five years equals 4.8 months annually), I can still qualify for the capital gains tax exclusion. Is this understanding correct?

Rick

Quote from @Natalie Kolodij:

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.

Thanks for your insightful response! Just to clarify, I purchased this rental property with 100% financing—$209K from a conventional 75% LTV loan and $70K from my HELOC. While I did spend about $15K on renovations, that amount doesn't need to be factored in for this discussion. If I refinance for $279K, my understanding is that the entire amount would be considered replacement debt. This mean the interest on the full $279K would be fully deductible, right?

Rick

I have two questions regarding mortgage interest tax deductions.

First, last year, I purchased a HUD property at a significant discount and used a $70,000 HELOC from my primary residence for the down payment. I understand that the interest on this HELOC should be tax-deductible, and I have documentation to support the transaction. Can you confirm if this is correct?

Second, I bought the property for $279,000, and its initial appraisal was $337,000. After completing renovations, the estimated appraised value has increased to $370,000. Now that the six-month seasoning period has ended, I'm considering refinancing the property. If I refinance for $279,000 and use $70,000 of the proceeds to pay off the HELOC, will the interest on the full $279,000 refinanced loan remain fully tax-deductible?

Rick

Quote from @Devin Peterson:

Quote from @Rick Im:

Does anyone know of a lender that offers second mortgages on rental properties? I've been working with several lenders for DSCR loans, but I've found that the fees are quite high, with minimal benefit in terms of lowering my current interest rate. To leverage the equity for financing my next deal, a second mortgage seems like a more cost-effective option. Any recommendations?

There are a very limited and reliable few of lenders that do true DSCR 2nds. Typically max leverage is 70CLTV - very higher Prepayment penalties and be ready for rates north of 12% - I answer this question all the time. Calculate the blended rate, your decision as to what to do (2nd or 1st lien refi) is all in the math! Happy to help crunch it. Good luck!

Thanks for the information Devin! Do you know any lender who offers 2nd position HELOC?

Does anyone know of a lender that offers second mortgages on rental properties? I've been working with several lenders for DSCR loans, but I've found that the fees are quite high, with minimal benefit in terms of lowering my current interest rate. To leverage the equity for financing my next deal, a second mortgage seems like a more cost-effective option. Any recommendations?

Quote from @Chris Seveney:

Quote from @Rick Im:

I recently submitted an offer on a house listed as having 5 bedrooms and 3 bathrooms. However, when I reviewed the property information on the PVA website, the records indicate it is a 3-bedroom, 2-bathroom property, excluding the 2 bedrooms and 1 bathroom located downstairs. Interestingly, the records do include the downstairs space as part of the livable square footage. This discrepancy has left me confused—should I be concerned about this? My agent said no but I want to get a second opinion.

Rick

 Basement square footage and room count are typically not counted on public record but in some states agents list it or are allowed to list it. 

Is this a concern? Possibly if the house is 3,000sf with the basement and the comps are 3,000sf above grade. 

For your agent to say you should not be concerned, again the answer is it depends.

Thanks for the reply, Chris! This is a split-level house, with the downstairs space being partially below grade (about 1/3). Functionally, it operates as a 2-story home since the downstairs area has multiple windows in each room and plenty of natural light. When I checked the PVA records, they show 2,419 living sq ft but list zero sq ft as basement. My assumption is that the county classifies this as a 2-story home rather than a 1-story with a finished basement. Do you think this classification might be incorrect? Your response also got me thinking about how this classification might impact the appraisal if this is not a mistake.

Rick

That's what I was thinking. Thanks for your reply, Jonathan!