All Forum Posts by: Rick Im

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

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.

 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.

Hey Rick,

Great questions! Start-up expenses like the ones you mentioned can’t be fully deducted in the year they’re incurred. Instead, they’re amortized over 15 years (180 months). That said, inspection fees for deals that didn’t work out and mileage from property viewings before actually purchasing a rental property aren’t considered start-up costs. Unfortunately, those are treated as personal expenses and aren’t deductible.

As for the repairs and improvements, fixing leaky pipes counts as a repair and can be fully expensed in the current year. Replacing countertops, though, is a capital improvement and usually has to be capitalized and depreciated over time. There’s a silver lining, though—if the cost of the improvement is under $2,500, you might be able to expense it under the IRS’s safe harbor rule.