We are buying a new build vacation rental home. We’ve paid the deposit and the home will be ready in early March.
I assume the mortgage interest is deductible (and not the full mortgage payment) in which case I would expect the yield to be circa $1k pm after all deductions. YOU ARE CORRECT, only the interest… and real estate tax and insurance are deductible but not the principal of the payment.
We will be spending circa $45k on furnishing the property (8 bedrooms so lots to buy) and was intending to start buying stuff from Black Friday. Good plan.
Questions for you- do you recommend we set up the multiple member LLC- is that what you would do? THAT IS EXACTLY WHAT I WOULD DO BASED ON THE RECOMMENDATIONS OF ASSET PROTECTION ATTORNEYS. Are there tax benefits in doing so rather than just adding the rental income/expenditure to our joint tax return? THE TAX RESULTS WILL BE EXACLY THE SAME IF THERE IS A MULTIPLE MEMBER LLC or NOT (just a partnership or sole member LLC). THE LLC is an asset protection device that offers no additional tax benefits.
We recommend LLC’s elect to be taxed as Sub S corporations for OPERATING companies. This is not one of those. The result of a Sub S election or an LLC taxed as a partnership when the business is RENTAL are exactly the same. So, keep it as a multiple member LLC taxed as a partnership. The paperwork will be easier and there are more options for distributions although that won’t matter if the LLC is strictly you and your wife. Any other investors in this?
Also, do we need to have the LLC (if recommended) set up before being able to deduct expenses such as furnishings? Are expenses incurred in 2015 treated in our 2015 return even before closing on the house or would these be treated in 2016 once there is income being received? Does any of this mean we should delay incurring house related expense until 2016? Purchase stuff during the best time to purchase. Turns out we cannot depreciate anything until the asset is PLACED IN SERVICE. So, if you purchase furnishings today, depreciation does not start until we have the CERTIFICATE of OCCUPANCY and are attempting to rent the property. It does not have to be rented, only that you are actively treating it as a rental property by trying to rent it.
Another example… you are a manufacturer. You purchase a big machine in December, but it takes a month to hook up the electricity, etc. We can only depreciate when the machine is placed in service (operating). It does not matter when we pay for it, it only matters depreciation wise when placed in service.
Sorry for the questions- probably seem stupid to you! None of these are stupid questions. The stupid questions are the ones that are not asked! (yes, you can quote me on that although somebody probably already said it…)
You will have to keep track of the number of days you personally use the property or allow friends to use the property for no charge… and the number of days the property is rented. If you drive to the property for other than personal stays, keep track of the mileage. Think of this as a TRADE or BUSINESS (the tax laws do except for the personal usage part).
Tax wise, if the net result of this is a loss for 2016, I doubt there will be any tax benefits as your income is probably going to be too high based on 2014.
Loss example. Let’s say you show a loss of $30k. First restriction is you can only deduct $25k. The unused portion of $5k can only be carried forward into the next year.
However, your 2014 income was too high to be able to deduct anything… so the entire $30k would be carried forward and the math revised the following year.
The phase-out of being able to deduct in the current year starts at $100k. There is a formula I can explain if you really want the detail, but basically once your modified Adjusted Gross Income is $150k, you do not get to deduct the loss. It is all carried forward.We have a client with 23 rentals. His income is so high he has not had any kind of tax loss for the last 15 years! BUT, let’s say he sells #17 this year. We take all the unused losses for 17 years and throw them into the calculation of whether there is any taxable income as a result of the sale this year. So, you don’t get the losses now based on income, but you get the losses in the year of sale.