Posted by Rick Wheat on August 08, 2000 at 20:46:14:
you don’t think you can deduct both the interest as well as the depreciation on this house. To the best of my knowledge, whoever is making the payment for the mortgage note (namely you), is entitled to receive the interest deduction. Even though the loan is still in the seller’s name, you are paying the payment, as well as making a payment to him on his seller-held 2nd mortgage. I think you get to deduct on both counts.
As far as the depreciation, whoever OWNS the property (again, namely you when you GET THE DEED), gets the write-off for depreciation.
Another case of “Why not buy the property instead of Lease/Optioning it!”
Wrap - Can I depreciate the property? - Posted by Paul(FL)
Posted by Paul(FL) on August 08, 2000 at 18:55:02:
I want to take over a guys loan and have him take a second. The note will still be in his name. I am going to do this on a wrap. I know I can not take a deduction for the interest on his note, but can I depreciate the property? My tax lady doesn’t think so. I think I can if I record the warrenty deed. What do you people think???
If you rent out the property, you can and MUST depreciate it. This is the case whether you have the deed (recorded or not) or have an equitable interest via a contract for deed. The loan, still in the seller’s name, has NOTHING to do with ownership, but rather his liability for the note if you default.
In a typical wrap, the seller includes his equity in a note that also includes his own underlying mortgage loan. He collects your payments (principal and interest) and continues to pay on his own mortgage.
The interest you pay the seller on the wrap note is your deduction and his income. The interest he pays on his underlying mortgage loan is his deduction. If a third party loan servicer is handling all the payments, then they will take care of the rax reporting and send both you and the seller appropriate year-end tax forms.
If you have the deed AND you use the property for investment purposes, you are entitled to a depreciation expense.
The mortgage company will report to the IRS the interest and taxes in the mortgage holders name. When I take over the loan I attach a page to my tax return that says the loan was rported under SSN but is actually under mine. Even if you only have a contract for deed you have the equitable interest as owner that you can depreciate income property. The IRS only has a problem when two people try to take the same deduction. You may want to find a new tax lady familiar with real estate. You may also reconsider what your definition is of a wrap if the note is a QA or Non assumable loan.