Rental property loan interest & fees

[Ian Pilcher]

My wife and I just purchased our first rental property. We paid cash
for the property, because an unexpectedly low appraisal prevented us
from arranging our desired financing. (We plan on "refinancing" the
property within a couple of months.)

We borrowed $100,000 to fund the purchase:

* $50,000 came from my mother. We're paying her 5%, with monthly
interest-only payments and a balloon after 12 months.

I believe that the interest on this loan *is* deductible, right?

It looks like I'll also have to file a 1099-INT. Am I correct in
thinking that the cost of e-filing this form is also deductible on

* The other $50,000 came from my 401(k). I know that the interest on
this loan is not deductible, but there are also several fees
associated with it.

- Overnight mailing fee. This was deducted directly from my 401(k).
Since it came out of pre-tax funds, it shouldn't be deductible.

- A $75 "loan establishment fee" and quarterly "loan maintenance fees"
of $6.25. These will be deducted directly from my paychecks (as
will the actual loan payments). Unlike the loan payments, though,
these are simply fees charged by the 401(k) custodian.

Are these fees deductible?

Thanks!

--
========================================================================
Ian Pilcher arequ...@gmail.com
Sometimes there's nothing left to do but crash and burn...or die trying.
========================================================================

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[jay_wi...@alumni.pitt.edu]

On Thursday, May 23, 2013 9:10:37 PM UTC-7, Ian Pilcher wrote:
> My wife and I just purchased our first rental property. >
>

> Are these fees deductible?
>

Ian, you are now in the rental business and should seek more authoritative tax advice than you will find on this board. But for starters, you will become familiar with Schedule E where you will report income and all qualified expenses, including depreciation, related to your new property every year that it is yours.

You may get general ideas here, but you need to get professional guidance from someone who understands your unique situation.

In the meantime, save all your receipts.

Jay Wiedwald
Oakland, CA

[Ian Pilcher]

On 05/24/2013 11:42 AM, jay_wi...@alumni.pitt.edu wrote:
> You may get general ideas here, but you need to get professional
> guidance from someone who understands your unique situation.

OK, let me ask the question in a more general way.

In most cases, interest and fees related to a loan which is used to
purchase a rental property are deductible over the life of the loan.
In the case of a 401(k) loan, however, the interest deduction is
specifically disallowed by 26 USC 72(p)(3). This makes some sense,
because the borrower is effectively paying that interest to himself.

Would loan-related fees paid to the 401(k) custodian with after-tax
funds be (potentially) deductible?

I believe that the answer is yes. 72(p)(3) says nothing about any type
of expense other than interest, and the fees are a legitimate expense
related to the acquisition of the property. (The self-payment issue is
also not present.)

Thoughts?

--
========================================================================
Ian Pilcher arequ...@gmail.com
Sometimes there's nothing left to do but crash and burn...or die trying.
========================================================================

[Pico Rico]

"Ian Pilcher" <arequ...@gmail.com> wrote in message
news:519E88B3...@gmail.com...

> My wife and I just purchased our first rental property. We paid cash
> for the property, because an unexpectedly low appraisal prevented us
> from arranging our desired financing. (We plan on "refinancing" the
> property within a couple of months.)
>
> We borrowed $100,000 to fund the purchase:
>
> * $50,000 came from my mother. We're paying her 5%, with monthly
> interest-only payments and a balloon after 12 months.
>
> I believe that the interest on this loan *is* deductible, right?
>
> It looks like I'll also have to file a 1099-INT.

Are you sure? Are you in the real estate "business"? Merely having a
rental or two does not make you in the "business" of real estate rentals,
and if you are not you do not have to file 1099s.
https://groups.google.com/d/msg/misc.taxes.moderated/RyFK9dXm-cQ/xbE7XwDkqFsJ
has more information.

Am I correct in
> thinking that the cost of e-filing this form is also deductible on
>
> * The other $50,000 came from my 401(k). I know that the interest on
> this loan is not deductible, but there are also several fees
> associated with it.

Have you carefully reviewed the statute with regard to interest not being
deductable? There are tests to be met for this to be true. And if the test
is met, isn't the "loan" from the plan treated as a distribution, with its
own tax consequences? I am no expert here, but there may be more to it than
meets the eye.

>
> - Overnight mailing fee. This was deducted directly from my 401(k).
> Since it came out of pre-tax funds, it shouldn't be deductible.
>
> - A $75 "loan establishment fee" and quarterly "loan maintenance fees"
> of $6.25. These will be deducted directly from my paychecks (as
> will the actual loan payments). Unlike the loan payments, though,
> these are simply fees charged by the 401(k) custodian.
>
> Are these fees deductible?
>
> Thanks!

--

[Alan]

On 5/23/2013 10:10 PM, Ian Pilcher wrote:
> My wife and I just purchased our first rental property. We paid cash
> for the property, because an unexpectedly low appraisal prevented us
> from arranging our desired financing. (We plan on "refinancing" the
> property within a couple of months.)
>
> We borrowed $100,000 to fund the purchase:
>
> * $50,000 came from my mother. We're paying her 5%, with monthly
> interest-only payments and a balloon after 12 months.
>
> I believe that the interest on this loan *is* deductible, right?

Yes, as long as you can adequately trace the loan to the property
purchased to satisfy an audit.

>
> It looks like I'll also have to file a 1099-INT. Am I correct in
> thinking that the cost of e-filing this form is also deductible on

You are not required to issue form 1099-int to your mother. (Treas. Reg.
Sec. 1.6049-5(b))

>
> * The other $50,000 came from my 401(k). I know that the interest on
> this loan is not deductible, but there are also several fees
> associated with it.
>
> - Overnight mailing fee. This was deducted directly from my 401(k).
> Since it came out of pre-tax funds, it shouldn't be deductible.

Correct.

>
> - A $75 "loan establishment fee" and quarterly "loan maintenance fees"
> of $6.25. These will be deducted directly from my paychecks (as
> will the actual loan payments). Unlike the loan payments, though,
> these are simply fees charged by the 401(k) custodian.
>
> Are these fees deductible?

Yes for sure on the quarterly fees. The establishment fee most probably
should be amortized over the term of the loan as it appears to be a
capital expense.
>
> Thanks!

[Mark Bole]

On 2013-05-24 16:52, Pico Rico wrote:

>> It looks like I'll also have to file a 1099-INT.
>
> Are you sure? Are you in the real estate "business"? Merely having a
> rental or two does not make you in the "business" of real estate rentals,
> and if you are not you do not have to file 1099s.
> https://groups.google.com/d/msg/misc.taxes.moderated/RyFK9dXm-cQ/xbE7XwDkqFsJ
> has more information.

I think the response above confuses 1099-INT with 1099-MISC. It's only
the latter that calls into play the notion of a "trade or business".

However, as Alan posted, for completely different reasons, it may be
that a 1099-INT is not required. It's not a mortgage, so your mom
doesn't have to issue you a 1098 form.

Note: I actually skimmed through (Treas. Reg. Sec. 1.6049-5(b)) as
cited by Alan but did not find anything that exempted the mother of the
taxpayer... ;-) Meaning, I can't find the exact sub paragraph that Alan
was referring to.

--

Mark Bole, EA
Enrolled Agents - America's Tax Experts
http://markboletax.com

[Alan]

On 5/24/2013 8:49 PM, Mark Bole wrote:
>
(b) Interest excluded from reporting requirement. The term interest or
original issue discount (OID) does not include�
(1) Interest on any obligation issued by a natural person as defined in
�1.6049�4(f)(2), irrespective of whether such interest is collected on
behalf of the holder of the obligation by a middleman.

and
�1.6049�4(f) Definitions. For purposes of section 6049, this section,
and ��1.6049�5 and 1.6049�6:
(1) Person. The term person includes any governmental unit,
international organization, and any agency or instrumentality thereof.
Therefore, interest paid by one of these entities must be reported
unless one of the exceptions under section 6049 applies.
(2) Natural person. The term natural person means any individual, but
shall not include a partnership (whether of not composed entirely of
individuals), a trust, or an estate.

Also see the instructions for who has to file a 1099-int.

[Pico Rico]

"Mark Bole" <ma...@pacbell.net> wrote in message
news:knp8ju$joa$1...@dont-email.me...

> On 2013-05-24 16:52, Pico Rico wrote:
>
>>> It looks like I'll also have to file a 1099-INT.
>>
>> Are you sure? Are you in the real estate "business"? Merely having a
>> rental or two does not make you in the "business" of real estate rentals,
>> and if you are not you do not have to file 1099s.
>> https://groups.google.com/d/msg/misc.taxes.moderated/RyFK9dXm-cQ/xbE7XwDkqFsJ
>> has more information.
>
>
> I think the response above confuses 1099-INT with 1099-MISC. It's only
> the latter that calls into play the notion of a "trade or business".
>
> However, as Alan posted, for completely different reasons, it may be that
> a 1099-INT is not required. It's not a mortgage, so your mom doesn't have
> to issue you a 1098 form.
>
> Note: I actually skimmed through (Treas. Reg. Sec. 1.6049-5(b)) as cited
> by Alan but did not find anything that exempted the mother of the
> taxpayer... ;-) Meaning, I can't find the exact sub paragraph that Alan
> was referring to.
>

I think the above response (mine, citing a prior post) pertains to ALL
1099s. I see no distincition between types of 1099s.

on the other hand, I did see the cited Treasury Regulation which states:

(b) Interest excluded from reporting requirement. The term interest or

original issue discount (OID) does not include-

(1) Interest on any obligation issued by a natural person as defined in

�1.6049-4(f)(2), irrespective of whether such interest is collected on

behalf of the holder of the obligation by a middleman."

on the OTHER other hand, I see
http://www.irs.gov/uac/Form-1099-INT,-Interest-Income which states:

File Form 1099-INT, Interest Income, for each person:

1.. To whom you paid amounts reportable in boxes 1, 3, and 8 of at least
$10 (or at least $600 of interest paid in the course of your trade or
business described in the instructions for Box 1. Interest Income),
2.. For whom you withheld and paid any foreign tax on interest, or
3.. From whom you withheld (and did not refund) any federal income tax
under the backup withholding rules regardless of the amount of the payment.
Report only interest payments made in the course of your trade or business
including federal, state, and local government agencies and activities
deemed nonprofit, or for which you were a nominee/middleman. Report
tax-exempt interest, only on Form 1099-INT. You do not need to report
tax-exempt interest that is original issue discount (OID). Report interest
that is taxable OID on Form 1099-OID not on Form 1099-INT.



I don't know how many "other hands" we are supposed to have when researching
tax law and regulations.

[Alan]

The problem with many of the IRS summary pages is that tey cite the
general rule. If you look at the actual instructins you will find the
general rule and then you will find the exceptions such as:

Interest excluded from reporting. You are not
required to file Form 1099-INT for interest on an obligation
issued by an individual, interest on amounts from sources
outside the United States paid outside the United States
by a non-U.S. payer or non-U.S. middleman, certain
portfolio interest, interest on an obligation issued by an
international organization and paid by that organization,
and payments made to a foreign beneficial owner or
foreign payee. See Regulations section 1.6049-5 for more
information.

[Pico Rico]

"Alan" <temp...@vacationmail.com> wrote in message
news:knqtc6$1u6$1...@dont-email.me...

yes, I saw that after my post, but I had already run out of hands.

It is a real problem when the IRS posts false statements.