Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (22) | Ignore Thread Prev Thread | Next Thread
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: Depreciation Date: 4/23/2008 9:24 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I've converted my primary into a rental house, having moved out of it. Cause the primary loan has adjusted upwards, the rent does not cover the mortgage, insurance, and taxes. My question is one on depreciation. If I don’t have any positive income, what is the benefit of Depreciation on my taxes? Also, the IRS mandates this, so I have no choice? I really don't care (or see why I should care) to carry forward deprecation losses year over year, and am concerned that this depreciation will not help my situation when I sell the house. (assume no 1031)

Please, I know that an investment property that has negative cash flow is not a good 'investment', but suppose I want to hold on and sell for appreciation in a few years… I am not a real estate professional.

Essentially, for someone with no postive income form the rental, is the sole benefit of carrying depriation losses forward that of offsetting appreciation gains when time to sell, creating a wash?

Thanks!
Print the post Back To Top
Author: MarinBMWZ4 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100533 of 120809
Subject: Re: Depreciation Date: 4/23/2008 10:16 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Essentially, for someone with no postive income form the rental, is the sole benefit of carrying depriation losses forward that of offsetting appreciation gains when time to sell, creating a wash?
--------------
OK. It's real simple, so don't try to make it more complicated that it should be.

1. You own a "rental property" and you have established your "basis" (the cost of the property less the land portion) when the property is put into service (this is a private home turned rental, not a straight investment purchase).

2. You rent the home for the market rate. This is your income.

3. You then have expenses, such as insurance, that is totaled up on your schedule E.

4. You have a fixed annual depreciation amount that is calculated on a 27.5 year term from the "basis" number you established. (I won't get into the other property in the home that can be depreciated at a different "schedule - i.e. term).

5. You add ALL these numbers together, and IF, it is over $25,000 you carry forward the amount over $25,000 (think of it like a safe deposit box and it's Sunday and you can't get in the vault - it's still there) into the future until 1 or more of many things happen where you can use that "carried forward" amount. {you have less than $25,000 in deductions on the schedule E, you sell the property, you do a 1031 exchange,, etc. etc.)

6. You subtract (dollar for dollar) the amount up to $25,000 from your normal taxable income - your work money. This reduces your tax due. This is very important. You are paying less tax.

7. This $25,000 high limit is adjusted DOWN as your taxable income goes up, at some point you cannot deduct any of the $25,000. You are now carrying forward $25,000 or more. I am carrying forward over $50,000 in "losses" that I can apply when appropriate.

These LOSSES have been generated by my tenants paying my mortgages as the property value goes up while I have leveraged my down payment to create the losses (paper) and gains (appreciation).

This is rental property income / losses / benefits.

I know that this is a simplified outline and there are many nuances and situations that can substantially affect the outcome and the benefits. Each deal is different. Each tax benefit is different. etc.

MZ4

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100535 of 120809
Subject: Re: Depreciation Date: 4/23/2008 10:34 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
My normal taxable income has already been offset by all my primary residence deductions. So assuming I have a 30K loss per year including depreciation, this in no way helps me reduce my taxable income further. I suppose I carry this forward ad infinitum? and it only helps me when I sell?

Print the post Back To Top
Author: maracle Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100537 of 120809
Subject: Re: Depreciation Date: 4/24/2008 12:01 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
How high is your negative cash flow? With a loss that high on a single property I'd have to wonder if your negative cash flow is too high to be offset by future appreciation.

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100538 of 120809
Subject: Re: Depreciation Date: 4/24/2008 2:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Assume cash flow is 0, and if the property is 700K, then that is significant depreciation to carry forward, agreed - but what can / should I do?

Print the post Back To Top
Author: EarlyToRise Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100539 of 120809
Subject: Re: Depreciation Date: 4/24/2008 2:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
what can / should I do?

Since you have a negative cash flow every day you own it, selling has to be an option. How far in the future do you anticipate rent will rise sufficiently to provide a positive real cash flow? Months? Years? Longer?

ETR

Print the post Back To Top
Author: maracle Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100541 of 120809
Subject: Re: Depreciation Date: 4/24/2008 3:46 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Assume cash flow is 0, and if the property is 700K, then that is significant depreciation to carry forward, agreed - but what can / should I do?

But you've already said cash flow is less than 0, right?

If the property is worth 700k that doesn't mean you can depreciate 700k. You have to subtract the land value, which could be a very substantial amount depending on where you live.

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100543 of 120809
Subject: Re: Depreciation Date: 4/24/2008 4:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
well, here's the kicker, it is also under water, cause it has a Pay Option ARM, so I am banking on appreciation in the next year, and then sell.

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100547 of 120809
Subject: Re: Depreciation Date: 4/25/2008 8:39 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
well, here's the kicker, it is also under water, cause it has a Pay Option ARM, so I am banking on appreciation in the next year, and then sell.

Banking on appreciation that will exceed the negative amortization that you are currently building by making the minimum payments on a Pay Option ARM? Where is this property that it is still appreciating at this rate?

You'd be best off to put it on the market now, even if you have to do a short sale. You will likely just end up with an even larger short sale, if not foreclosure, in a year.

AJ

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100548 of 120809
Subject: Re: Depreciation Date: 4/25/2008 9:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
A townhouse with NYC Hudson river views... however, I agree on the short sale, but there are 2 obstacles, it impacting my credit, and having to bring cash to the closing...

Print the post Back To Top
Author: EarlyToRise Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100549 of 120809
Subject: Re: Depreciation Date: 4/25/2008 10:57 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
I agree on the short sale, but there are 2 obstacles, it impacting my credit, and having to bring cash to the closing...

Not to be rude, and trying to flag this as a caution scenario to lurkers, but the time to think about those things is before signing an Option ARM and paying little or no down payment.

I hope this works out for you.

ETR

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100550 of 120809
Subject: Re: Depreciation Date: 4/25/2008 12:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Is that a statement you've advised to the hundreds of thousands of people who bought into and created this subprime mess? :)

I'm just looking for survivor techniques from the board - thx.

Print the post Back To Top
Author: EarlyToRise Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100551 of 120809
Subject: Re: Depreciation Date: 4/25/2008 12:31 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Is that a statement you've advised to the hundreds of thousands of people who bought into and created this subprime mess? :)

Unfortunately, it's wisdom earned the old-fashioned way: by screwing up myself. Regarding your situation, it seems that you already know your basic options:

1. Sell now, and borrow funds to bring to the table.
2. Short sale now, with damage to credit.
3. Rent and depreciate for a while, continue to throw good money after bad, and hope that you can stay above water long enough to appreciate into a net-zero sale. If #3 does not work, then return to #1 and #2 above, potentially in a worse situation than you're in today.

I'm sure there are more elaborate ploys to try; you might try posting to "Personal Finances / Buying or Selling a Home" and specifically requesting an opinion from Dwdonhoff. His sig says "Leverage Planner," so be aware that his options are not necessarily for the faint of heart.

ETR

Print the post Back To Top
Author: RealTaxTips Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100552 of 120809
Subject: Re: Depreciation Date: 4/25/2008 1:33 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
By all means, you should take the depreciation now.
Do you have other properties? You can use this loss to offset future income.
The IRS will recapture the depreciation you should have taken even if you didn't take any, so the bottom line is: You need to take the Depreciation deduction.

I even segment my depreciation to accelerate the deductions... can't imagine why anyone would choose not to.

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100554 of 120809
Subject: Re: Depreciation Date: 4/25/2008 3:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I just need enough equity to refinance out of the Pay Option I suppose. I really want to avoid a short sale - isn't it my ethical duty to do so as well? I suppose the lender will see no delinquencies as of yet, so probably wouldn't even do the short sale...

Print the post Back To Top
Author: EarlyToRise Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100557 of 120809
Subject: Re: Depreciation Date: 4/26/2008 10:22 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I really want to avoid a short sale - isn't it my ethical duty to do so as well?

It's gray, for sure. If you are willing to take the significant credit hit, and the bank is willing to take the loss, then there is no deceit or fraud.

ETR

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100559 of 120809
Subject: Re: Depreciation Date: 4/26/2008 11:45 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 4
I just need enough equity to refinance out of the Pay Option I suppose.

Unfortunately, by turning the home into a rental property, you have raised the amount of equity you will need to be able to refinance. In the current credit environment, investor properties generally require at least 10% equity to refinance, while owner-occupied properties may require as little as 3% - 5%. And by making minimum payments on the Pay Option ARM, you are limiting your equity growth rather severely.

Is there any way you could afford to move back into the home?

If you cannot afford to move back into the home, you are unlikely to get much help from the lender. Lenders are all focused on helping homeowners stay in their homes. Investors are pretty far down on their list, as the publicity from investors losing their assets is not nearly as bad as the publicity from tossing families out of their principal residences.

Also, from a tax standpoint, while homeowners who have mortgage debt forgiven because of a short sale or foreclosure this year and next will have no taxes due on the 'income' that they derived, investors will have taxes due. So it is really in your best interest to make the home back into your principal residence if you can possibly afford to.

I really want to avoid a short sale - isn't it my ethical duty to do so as well? I suppose the lender will see no delinquencies as of yet, so probably wouldn't even do the short sale...

If you haven't had any late payments on the mortgage, and if you have other assets, the lender is unlikely to work with you, especially since the home is no longer your primary residence. Especially if there is some equity in the home, which you seem to indicate there is, the lender would rather have you pay off the mortgage with whatever assets you have, rather than do a short sale. If you are upside down in the home, it will again depend on what your other assets are, and if your state allows deficiency judgements. Apparently New Jersey does allow them: http://www.foreclosures.com/www/pages/state_laws2.asp?state=NJ

If you have other assets, you may be forced to liquidate them in order to satisfy either the deficiency caused by a sale for less than is owed on the mortgage, or the deficiency caused by a foreclosure.

AJ

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100582 of 120809
Subject: Re: Depreciation Date: 4/28/2008 10:04 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Sorry, because of the Pay Option, there is no equity in the home. I actually was contemplating moving back in, but then I'd have to rent my primary, which is also slightly upside down due to market conditions, and moreover the rental wouldn't cover the expenses.

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100583 of 120809
Subject: Re: Depreciation Date: 4/28/2008 3:04 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Credit hit is not really an option for me, and I think my only option at this time is to have my paycheck keep this thing afloat, so sad, but hoping it is temporary :(

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100585 of 120809
Subject: Re: Depreciation Date: 4/28/2008 4:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 4
Credit hit is not really an option for me, and I think my only option at this time is to have my paycheck keep this thing afloat, so sad, but hoping it is temporary :(

Since you have the paycheck to keep it afloat, do you have other assets that you could use to satisfy a deficiency if you sold it for less than you currently owe?

Seriously, keeping it for another year while making minimum payments on a Pay Option ARM is just likely to end up with a larger deficiency a year from now, if you can't make at least the interest-only payments.

Unless you are willing to keep it afloat for several years (probably 5 - 10), keeping it afloat will likely be a losing proposition. And keeping it afloat for that long would probably mean that you will need to pay the amortizing payment at some point, since Pay Option ARMs usually have a 5 year or less period for non-amortizing payment options.

AJ

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100593 of 120809
Subject: Re: Depreciation Date: 4/29/2008 10:13 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I do not have the assets or cash to bring to a closing if short on the mortgage, and yes, I suppose I need to get to a place where I can pay at least the interest only, but this is why I'm posting, I'm in a bad situation currently.

Print the post Back To Top
Author: airahcaz Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 100675 of 120809
Subject: Re: Depreciation Date: 5/4/2008 11:46 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Sorry, not to bump this thread, nor to show further negligence on my part for stating this, but on one of my properties, turbotax didn't take add the depreciation for some reason, and for 2007, this carried over, so no depreciation for two years. Does it make sense to amend the returns at this point, or just ensure that the depreciation is there or starts for 2008? what would be the real advantage?

Thanks

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (22) | Ignore Thread Prev Thread | Next Thread
Advertisement