Third House

[whkrueg]

Good Morning All,


I have a client who has 3 houses. The first is his primary residence, the second is a vacation house, the third is a house he bought as tax write off. His grandson lives in the third house and the client does not collect any rent from him. His only expenses with that house are the mortgage interest and real estate taxes. He has no mortgage on his primary house or the vacation house. His only income is 100k from a pension and 22k from social secuirty. He bought the third house in 2010.

My question is where is the best place to show the mortgage interest and real estate taxes, as he is collecting no rent for it, Schedule A or Schedule E.

Since he is collecting no rent, would not it be considered to be rented below FMV and there fore could he not deduct expenses on Schedule E. As he is carrying no mortgages on his primary house and vacation house, would there be a problem putting the mortgage interest on Schedule A. I don’t believe there would be a problem with putting the real estate taxes on Schedule A.

I have also been told that I could show the interest on form 4952 "Investment Interest Expense Deduction" However, the deduction is limited to investment income and since he is not collecting rent, there is no income, so no deduction.

I did not do his taxes last year so I don’t know how it was presented on his 2010 return. He will bring them next time he comes in the office. I want to be sure to do the right thing for him so it doesn't come back to him later on.

Your input appreciated…..

Thanks
Wayne Krueger


April Allen writes… @ 3/30/2012 10:10 PM
He can take all real estate taxes on Sch A. That is not limited. The only place to take the mortgage interest for the 3rd house would be as investment interest and it would be limited to investment income. Sch A via the form 4952.

[whkrueg]

Third House

I should point out that TTB cites a court case where a judge decided that since the house was rented a less than FMV you could not take any expenses on Schedule E but could take the Real Estate Taxes and Mortgage Interest on Schedule A. Unless I am reading that worng.

[FEDUKE404]

Tax write-off?

This guy bought a third house "as a tax write-off" and then there is (virtually) no tax write-off?? I wonder who gave him that advice...

Or, perhaps, there is more to this picture??

I agree the property taxes should not be a problem - Schedule A. The mortgage interest is a problem for house #3. As for the "investment interest" route, the absence of sufficient "investment income" might sink that boat. FWIW: Without doing research, I'm not really sure (pseudo-) rental income would even qualify as investment income. I could easily be wrong on that, however.

I have had clients who, for whatever reasons, rented a home at less than FMV. IIRC, they could take their net income to zero but not below zero. I think there was a pecking order of what gets deducted first. So much for a "write-off" ?? Of course, with (apparently) zero rental income, that point is moot.

Again, there is something with this tax scenario that just does not pass the smell test, or at least the common sense test.

Viewing that 2010 return could be very eye-opening!!

FE

[JohnH]

This guy bought a third house "as a tax write-off" and then there is (virtually) no tax write-off?? I wonder who gave him that advice...

Or, perhaps, there is more to this picture??

I agree the property taxes should not be a problem - Schedule A. The mortgage interest is a problem for house #3. As for the "investment interest" route, the absence of sufficient "investment income" might sink that boat. FWIW: Without doing research, I'm not really sure (pseudo-) rental income would even qualify as investment income. I could easily be wrong on that, however.

I have had clients who, for whatever reasons, rented a home at less than FMV. IIRC, they could take their net income to zero but not below zero. I think there was a pecking order of what gets deducted first. So much for a "write-off" ?? Of course, with (apparently) zero rental income, that point is moot.

Again, there is something with this tax scenario that just does not pass the smell test, or at least the common sense test.

Viewing that 2010 return could be very eye-opening!!

FE

In my office, viewing that 2010 return might also be door-opening...

[whkrueg]

Third House

FEDUCK,

Thanks for the input. A little input about this client might help...

He is 78 years old and single, he is collects a 100k pension and 22k from SS. He has no deductions. He is not having enough tax withheld from his pension and virtually all his SS is taxable due his high pension and he is not having any tax withheld from his SS. I believe that this is the source of his tax problems to begin with. From what he told me owed the IRS 15k on his 2009 return. So I guess someone told him to go buy a house to he could take the deductions.

Which might be ok, if he doesn't live his grandson live there rent free.

I can't wait to see what his 2010 return looks like...

Wayne

[Gretel]

Agree that taxes can be deducted on Schedule A.

If mortgage for third house used this third house as collateral he cannot deduct mortgage interest on Schedule A. If however, he used his first home to take out out equity, then he can deduct interest for up to $100,000.

[RitaB]

Or

Agree that taxes can be deducted on Schedule A.

If mortgage for third house used this third house as collateral he cannot deduct mortgage interest on Schedule A. If however, he used his first home to take out out equity, then he can deduct interest for up to $100,000.

Or deduck it.

[KathMorgan]

Couple of Things

First off, you need to see if this client will let you fill out a W-4P and W-4V for him to go to his pension and the SS office.
Second thing, he needs to start charging his grandson rent, even if it is minimal. Tell the boy to get a job and quit taking advantage of his rich grandpa!
Third thing, if he plans on keeping all three houses then maybe he should reconsider what is is vacation home?

[RitaB]

Fourth

First off, you need to see if this client will let you fill out a W-4P and W-4V for him to go to his pension and the SS office.
Second thing, he needs to start charging his grandson rent, even if it is minimal. Tell the boy to get a job and quit taking advantage of his rich grandpa!
Third thing, if he plans on keeping all three houses then maybe he should reconsider what is is vacation home?

Fourth, if he needs to save money, quit buying houses. And quit thinking spending $10,000 on interest to save $2,500 is a good deal. Hello. Only in America.

[whkrueg]

Third House

Kath, Rita

Thanks for the input. I intend to have to have that conversation with him when he comes back on Monday.

Wayne

[peggysioux]

Mortgage Interest

If there is no mortgage on taxpayer's second house, why couldn't taxpayer deduct the interest on the third house. Mortgage interest is deductible on on second residence on Schedule A and IRS states "Taxpayers who own more than two residences may choose which is their qualified second home." Taxpayer can choose his qualfied second home as the home his grandson lives in.

Peggy Sioux

[JohnH]

Fourth, if he needs to save money, quit buying houses. And quit thinking spending $10,000 on interest to save $2,500 is a good deal. Hello. Only in America.

Yes, spending $10,000 in interest to saver $2,500 in taxes is a terrible idea. But spending $10,000 in tax preparation fees to save $2,500 in taxes is a wonderful idea - maybe grandpa will consider that strategy.

[taxmom34]

maybe grandpa should have paid cash for the third house. then his investment income should drop considerably and reduce his total income for the year.

[Lion]

Schedule A

I agree with Peggy. He can deduct mortgage interest on two houses. It doesn't have to be in the order he purchased them. Or even the same two every year. With only one mortgage, this is not a problem for your client.

And, as has been stated, he can deduct real estate taxes on any number of houses.

But, don't complete his return without viewing his 2010 return. Why did he leave that preparer? Why isn't grandson paying rent?

Work on his withholding.

[oceanlovin'ea]

Another question to ask would be - Did he buy the house as he said as an investment? Then later after he had bought the house, maybe grandson came along and asked grandpa to let him live in the house so it wouldn't be sitting empty.

Just thinking out loud.....but if he originally did buy it as investment income, does the fact that he decided to let grandson live in the house change the character of the property?

Linda, EA