Payoff Or Cash In?
Just curious as to the strategies this community prefers to use. On properties you buy and hold do you pay off the note for cashflow or do you cash out equity? I know the big answer is every property is different and it depends on the circumstances, but in general what are your philosopies on the subject? Thoughts?
In my case, right now I am trying to accumulate properties and all of my capital is tied up. So I am leveraging everything as much as possible.
Well, actually not as much as possible- I am unwilling to pay PMI as it eats up too much of what could be my profits. So I leverage as much as possible without paying PMI.
Once I have enough properties (how many is enough???) I intend to sell of some of the "worse" properties and use the equity and appreciation I have accumulated to pay off the ones I like the most. Then we will use the cashflow from these free and clear properties to support ourselves as we follow our many other dreams.
Chris
Newkid,
Interesting point you raise. I was not aware that interest paid on a HELOC was subject to use restrictions before one could deduct the interest.
This is contrary to what my broker and accountant have told me. In fact, my accountant has never asked me what the funds were used for and simply always deducts the interest.
Do you have any resources (IRS etc.) where I can verify these rules to make sure that I am not running afoul of the tax law?
Thanks.
JS.
smithj2,
I thought you were refinancing your investment properties. You never mentioned a HELOC on your primary residence.
The home mortgage interest deduction you take on Schedule A is limited to acquisition debt plus $100K with a cap at $1.1MM. The mortgage interest on the balance of your home mortgage loan that exceeds $1.1MM is not deductible. If the home equity loan on your primary residence is $100K or less, then the interest is deductible as home mortgage interest regardless of what you do with the funds.
Refinance your investment property, then tracing rules apply before the investment interest is deductible. Refinance your investment property to buy a boat, and the interest is not deductible. Put the money in the bank for a future investment, and the interest is not deductible until you purchase the investment.
Look up "Investment Interest deduction" on the IRS website for more specific information.
I recommend you talk to your CPA about this. You wil hear opinions here but your tax accountant is the best person to stand behind their word.
I formed a Corporation this past summer because I found this business interesting & intriguing and would like to learn all I can and slowly build up my holdings as I learn the right strategies.
If your investment plan is to acquire rental property to hold long term for income and future appreciation, then a corporation is probably the least appropriate business entity for you.
This is not just a tax question (yes it does put you in a disadvantageous tax position), it is also a legal question. You should really have a conversation with an attorney who practices estate planning and is well versed in entity structuring. Have the attorney explain how the LLC is a stronger asset protection entity than a corporation and gives you better tax treatment than a corporation.
Once their mother passed away, my MIL moved into the home, paid the taxes & insurance and upkeep. Well, it’s too much for her now and we are trying to find the best way for her to get out of the home with as little financial reporting responsibility as possible (the Senior aptmt. Rental Office will be looking at her financial records, I’m sure).
If your MIL is planning to apply for Medicaid assistance, then any property transfers occuring in the prior five years will be under scrutiny. A property transfer will have to be reported and included in the financial records. The value of the property that was transferred will affect her eligibility date for Medicaid assistance.
If I am given the property as a gift, will I have a gift tax imposed on me?
No, Gift Taxes, if due, are paid by the giver, not the receiver.
Your MIL and her brother are both on title. If you are to be given a gift of the property, they both will have to sign the deed transferring title to you.
If I give my family members (previous joint owners) cash and a $0 dollar amount is on the new Deed as the sale price, will this have any bearing on my business being able to claim the deductions on 2007’s taxes for the rehab of this property?
If your MIL and her brother are now previous joint owners, who owns the property now?
If you pay $0 for the property, or an amount less than FMV, the difference between FMV and the amount you paid is a gift. Brings Gift Tax into play for your MIL and her brother.
Regardless of the amount paid or not paid for the property, rehab costs are not deductible. Rehab costs are capital improvements and increase the cost basis for the property.
maybe I can use the cash to prepay towards a large expense they mentioned to me (they are in their 70’s and don’t make the minimum income to have to file taxes and the amount I give them still won’t take them over that minimum
Gifts are not counted as taxable income by the receiver. Gift taxes, if any are due, are paid by the giver.
I have used Eric Meyer with Capital Financial Group in Bethesda. His primary focus is financial planning but he is well versed in estate planning.
Perhaps he can give you a referral to someone in your locale who practices in the areas you need help.[ Edited by NewKidInTown3 on Date 02/19/2007 ]