tax REI question - Posted by eric

Posted by eric on November 08, 1999 at 14:41:35:

Thanks for the information bud and dave. I make a nice salary to cover maint. on the property. I don’t have many tax deductions. So, the idea of taking out a loan on the property and getting the tax free cash sounds nice to me. I will not let the money sit in the bank earning little interest , I have plans for it!!!

tax REI question - Posted by eric

Posted by eric on November 07, 1999 at 22:39:41:

I have a rental that was left to me by a relative. It is free and clear. If I take out a mortgage on the property, will I have to pay income tax on the money???

thanks

A couple of things to consider… - Posted by Roy_MA

Posted by Roy_MA on November 08, 1999 at 09:39:39:

and you are in the catbird seat for both of them.

First, what is your stepped up basis cost? That is defined as the value of the property on the date of death of your relative. If your relative’s will was probated, then the executor/executrix should have had an appraisal done on the property. The arrived upon appraisal is, in effect, your acquisition cost basis. Any improvements, or depreciation will probably be based on the appraisal figure. I am not a CPA here, so getting this figure as it applies to you would be the first place to start.

Why? Because if the property is rented, you will be allowed a depreciation expense for taxes. That expense is not normally mentioned on this board, but everyone uses it to minimize taxes.

Second, is the matter of money. Your net rental income will be quite high because your net operating income to pay the mortgage will be quite high (“free and clear.”) As Lonnie would say, “good enuff.” And why would you want to take a mortgage on the property? Do not mis-understand me here: I’m not saying not to…but if you are using the morgage money to acquire more money for investing purposes, why not use your equity in the rental, give a blanket mortgage on the property to a future seller as collateral with that mortgage to be released after a certain period of performance?

I’ll stand to be corrected here by others who post to this board, but that could give you a great deal of leverage in any future transactions.

Just a thought.

Roy

Re: tax REI question - Posted by Dave T

Posted by Dave T on November 07, 1999 at 22:53:38:

Borrowed money is not taxable unless the debt is forgiven.

The rental income from your property is taxable. If you mortgage the rental property, the interest you pay on the debt reduces your taxable rental income.

Re: tax REI question…80k TAX FREE??? - Posted by eric

Posted by eric on November 08, 1999 at 08:32:50:

Thanks for the info Dave. Just to be sure I understand you though. The house is worth about 100k. If i mortgage the property for 80k, which I am told is the max I can borrow on a rental, this money is tax free because it is considered a LOAN and not INCOME?? The house rents for $700 per month which will just about cover the mortgage I intend to get. Am I understanding this correctly Dave? I will also run this by my tax guy when I get a chance. Any other hints on how to max my profits from this house would be appreciated. I want as much cash as possible out of the property now since I am no spring chicken!

You got it right - Posted by Dave T

Posted by Dave T on November 08, 1999 at 11:41:50:

Yes, borrowed money is a loan and not taxable income.

If you want the maximum cash flow, do not mortgage the property – just collect rent. You will still get a depreciation deduction for the property that will offset your net rental income.

If you mortgage the property to the maximum, and your rental just about covers your debt service, you have created a negative cash flow situation. Even if your rent covers the debt service, repair and maintenance costs will come out of your pocket.

If you just want the maximum cash out of the property now, follow Bud’s advice and just sell it. If you have some immediate need for the money, then you are in the best position now with very little capital gains to maximize your equity cash out.

If you don’t have an immediate need for the money, I recommend you keep the property as a free and clear rental, raise rents in the future, and watch the property value increase through appreciation.

Re: tax REI question…80k TAX FREE??? - Posted by Bud Branstetter

Posted by Bud Branstetter on November 08, 1999 at 10:53:29:

eric,

The way to max your cash out is to sell. If you have a stepped up basis via inheritance your tax consequences are minimal. An installment sale could do the same thing if you sold the note. The concern I would have is taking out a loan at an investor loan of 8-10% only to put the money into an account that gives you considerably less until you spend it. If you are looking for more income than the typical 1%/mo. income there are ways to accomplish that.