Deductibility of the investment property taxes/interest

[investor123]

I am about to buy my first investment property which is the residential land. I am putting 10% down and I will be paying the following for interest, property taxes.

Loan amount: 125000
Yearly property taxes: 1356
Yearly interest: 8500

My question is

1. If I buy it on my own name can I deduct the property taxes and interest on my income taxes like my primary residence.

2. Is there any tax benefit of forming the llc and buying it under llc.

3. I have some equity in my primary residence does it make sense to take the home equity loan and pay off the property but in this case only 100,000 will be deductable.

In short what makes the most sense for tax purpose.

[kdhastedt]

<1. If I buy it on my own name can I deduct the property taxes and interest on my income taxes like my primary residence.>

Yes, although, you will need to use Form 1040, Schedule E (Supplemental Income and Loss) to show your rental income and declare your expenses.  The interest goes on line #12 and the taxes go on line #16.  You can also deduct the cost of the insurance on the property (line #9).  There are a lot of deductions for landlords.  Make sure you understand them and take all of the deductions that you are LEGALLY entitled -- it's YOUR tax money being wasted if you do not.  Don't forget there is also a deduction for depreciation (of the structure and of the appliances, carpets, drapes, etc...) and that, depending upon your income, you might be able to offset real estate losses against your regular income.

3.  It is my opinion (and you know what they say about opinions...LOL), that unless absolutely necessary, you should not put your private residence on the line for investment property.  I know there are others in this forum that do and they can do that but I really don't like mixing the business with the private unless necessary...I think if you can swing a loan against the rental property, that would be the way to go...

My two cents, hope it helps!

Keith

[investor123]

Thanks for the info it really helps me a lot as I am doing it for the first time.

I just want to make sure that what you said in (1) applies even if I do not have any rental income as it is residential land with no structure build yet. I am NOT planning on building anything for now.

[kdhastedt]

...ahh...I misunderstood.  No, you cannot use the Schedule E then...

My mistake, I thought it was an investment property.

[investor123]

ok so what do I need to do inorder to deduct the interest and property taxes.

[WilsonTaylor]

You need to earn income from the property, either rent or business income.

Wilson

[kdhastedt]

This is probably why you never hear anyone say, "Run out and buy vacant land...it'll make you rich"...

Vacant land is almost always an alligator eating the greenery directly out of your back pocket...you pay taxes, mortgage, and possibly insurance and receive little or no income...

That's why when the name of the thread was "Deductibility of investment property..." I thought you really had some investment property.

[sheridan06]

Wait a minute...so what you guys are saying is that if someone owns a piece of raw land with no structures for renting out, and the land is simply an investment to possibly 1031 later, then that person cannot deduct the mortgage interest and insurance costs each year?

I've got an LLC with 4 other parties, and we have purchased land that we plan on either 1031 exchange later or subdividing and selling, but until that time, we all plan on deducting 20% of the mortgage interest and insurance costs each year.

[WilsonTaylor]

Until you recieve income from the property, it is merely speculation and the interest you pay is merely an increase in your investment.  If you buy a house for rehab and remodel it, the interest that you pay is an increase in the basis of the property, but is not deductible until you sell the property.  If you rent it after you rehab it, then the interest after you start renting the property is deductible, but the interest before you rent it is not.

Wilson

[kdhastedt]

Raw land is rarely "investment property"...rarely "income property" (unless rented out for farming, etc and draws an income) -- it is, as Wilson says, speculative and an alligator eating the greenery from your back pocket...

From an investor standpoint, it is often NOT a good investment unless:

(1) you can turn it quickly (<2 years) for a large profit

(2) you can afford to have your money just sit until you can do something to it to make it produce or sell it

(3) you have 'insider' knowledge that something is going to happen (new freeway off-ramp, expansion of a nearby business, etc.)

(4) you can put something on it relatively quickly  to make it produce (storage buildings, etc.)

(5) it has agricultural, mineral, timber assets/value

[sheridan06]

kdhastedt - couple things.

First , here is some text from the www.irs.gov website regarding mortgage interest deductibility.  

"If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered regulated investment company (mutual fund), you can deduct your share of that entity's investment expenses. A partnership or S corporation will show your share of these expenses on your Schedule K-1."

Second, if you solely listen to 1 other person's advice in life, you'll often miss opportunities.  My piece of raw land happens to fall into your 3rd bullet point (insider information).  In fact, it's completely public information, but you have to have the diligence and savvy of this type of investment to make such an informed decision.  Thanks for your words of caution, but this land, and the additional land that our LLC is getting ready to purchase, is in the fastest growing municipality in the country.  You should see what is going on there.

later

[investor123]

so basically my cost basis is going up on raw land when I pay the interest which is not deductable. If I eventually sell the property for profit I will have to pay less taxes.

Does this apply to property taxes too or they are complete waste on raw land.

I am just trying to make sure I understand how the taxes and interest are treated and used for raw land.

[kdhastedt]

Sheridan:

<"If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered regulated investment company (mutual fund), you can deduct your share of that entity's investment expenses. A partnership or S corporation will show your share of these expenses on your Schedule K-1.">

The original poster's comments are about HIS land, not about YOUR corporation's land...if you knew the answer about YOUR land, why cloud HIS question???

<Second, if you solely listen to 1 other person's advice in life, you'll often miss opportunities. >

Very true...but I'm not sure I understand your intent/point...is there one?

< My piece of raw land happens to fall into your 3rd bullet point (insider information).>

First, I would contend that (accroding to your diatribe), this is not YOUR raw land but raw land belonging to a corporation to which you belong...

Second, again, what is your point?  It was listed as a bullet...I put the word insider in quotes to delineate non-textbook usage of the word.  I understand that that not all 'insider-type' information is "illegally-obtained insider information"...a lot of "insider" information is public record requiring digging -- often through permit filings.

<Thanks for your words of caution, but this land, and the additional land that our LLC is getting ready to purchase, is in the fastest growing municipality in the country.>

GREAT!  I wish you well, but I think you will find that this falls within bullet #1 or bullet #2...e.g., you can turn a profit relatively quickly or you can afford to sit on the investment until such time as it is profitable...

[Dave T]

investor123,

I disagree with most of the tax information given in the previous posts.  Here is my opinion.

1. If I buy it on my own name can I deduct the property taxes and interest on my income taxes like my primary residence.

Raw land held for future appreciation is investment property.  The property taxes can be deducted on Schedule A, but only if you itemize.  

The mortgage interest you pay is investment interest reported on Form 4952.  The land itself does not have to generate income, as long as you have other non-passive investments (such as stocks and bonds) that do generate taxable interest and dividend income.  Your investment interest expense deduction is limited to the amount of NET investment income reported each year, but any disallowed investment interest can be carried over to future years.  The result of your Form 4952 calculations is carried over to Schedule A, line 13.


Is there any tax benefit of forming the llc and buying it under llc.  

From a tax standpoint, NO.  In most cases the LLC is a pass through entity which means that the entity does not pay any income taxes in its own right, but instead passes all the income earned through to the taxpayer's personal tax return.  As John Hyre has said in these forums, the LLC is generally tax neutral

I have some equity in my primary residence does it make sense to take the home equity loan and pay off the property but in this case only 100,000 will be deductable.

Generally, no, but this is just my personal opinion.    I agree that, from a business perspective, you want to leverage your property rather than own it free and clear.  However, I would not want to encumber my personal residence with a debt that I could just as easily attach to the investment property.  What if you have some sort of emergency, and your HELOC is maxxed out because you wanted to pay off your investment property?  Where will you get the quick funds to meet your crisis -- certainly not from your free and clear investment property?  Better to keep your HELOC free and available for other uses when you have other alternatives.

[aak5454]

Dave T has it right in all regards......especially on the interest issue.  Been there and done that.