Posted by Natalie-VA on March 19, 2005 at 17:54:37:
I’ve been told that your interest may NOT be deductible depending on what you do with your proceeds. I didn’t believe it either. Check out:
I wonder if these rules change if he were to convert the property to a rental first and then pull the cash out?
With all of that said, my CPA said the odds of an auditor performing a trace to figure out where the proceeds went are slim.
Interest and Depreciation for Rental Unit - Posted by James
Posted by James on March 17, 2005 at 15:27:35:
I paid $80000 for my primary residence which has since appreciated to $300000. I plan to convert it to a rental property but would like to refinance before conversion for a total of $150000 to buy a car and some stock.
If I do this, is the interest on the full refi amount deductable after it’s converted to a rental? Would the basis for depreciation 80000, 150000, or 300000? If these amounts are limited, can I sell the property for $300000 to a LLC or S corp that I set up and then use the $300000 for depreciation and interest through the LLC or S corrp?
Re: Interest and Depreciation for Rental Unit - Posted by Jimmy
Posted by Jimmy on March 19, 2005 at 10:20:15:
your basis int he property is 80K. selling to an entity you control will not up the depreciable basis. that trick was shut down decades ago.
if the loan is secured by the property, the interest is deductible no matter what you do with the loan proceeds.
finally, there are some rules in the tax code about having debt in excess of basis. I studied those rules 20+ years ago, and have long since forgotten them. You might ask your tax preparer about it. You ma have an income recognition event.
Re: Interest and Depreciation for Rental Unit - Posted by dealmaker
Posted by dealmaker on March 17, 2005 at 22:03:06:
Hmmmm, not at all how I would do it, but let’s look at your questions. I’m not sure about the interest deductablilty, I don’t borrow money that way. Depreciation is the LOWER of cost or market, so it’s 80K-minus the land/27.5 years. I’m not sure about the ///sales either. Maybe I’m not much help here.
Sounds like a pretty nice place that will throw off $30,000/year in rent! Where are you and how long have you owned the place?
dealmaker