Unrented Rental Property in Puerto Rico Deductible?

[G2R]

So here's a doosy.  

My client bought rental property in Puerto Rico in April 2017.  They were fixing it up, getting it ready to rent and boom, Hurricane Irma & Maria hit.  Minimal damage, but no power for months so obviously not rentable.  Here's my question.  The apartment was ready to rent in August and was going to be advertised for rent just before the hurricanes hit.  (I don't have proof of this but this is what my client told me.) Obviously, it was never rented and finally was rented for the first time April 2018.

• Should I take the rental expenses for 2017 on their 2017 return despite the fact that it was vacant the whole time?
• If I do file the Schedule E and claim the rental, the client used a HELOC from their personal residence to buy for the rental property.  Loan was taken out Nov 2016, and they finally closed on the property April 2017.  Think I can deduct the fully year of interest on the HELOC on schedule E or only the prior 30 days before the closing and each month there after? 

[jklcpa]

53 minutes ago, GGRNY said:

going to be advertised

Was it or not?

I would probably say that this was not actually in service as a rental, or if it was for a short period, it was then quickly out of service for an extended period before becoming available again, even if it was from circumstances beyond their control.  As to the other expenses, I'd capitalize all of the carrying charges possible so that those aren't completely lost. They'll get the deduction over time via depreciation, but it is better than not as all.

You know that HELOC interest on the rental won't be deductible on Sch E starting with 2018, right?

[jklcpa]

Give it a few minutes and someone else may offer some other justification or rationale for taking the deductions. 

[G2R]

Thanks Judy!  I agree, the SAFEST course seems to be capitalize the CC.  I think I might just go with this approach so I don't have to sweat an audit.  It's a weird situation given the natural disasters involved. 

However, I was under the impression that as long as the HELOC interest was used for rental property, then the interest would be deductible in 2018.  If it was used for personal, then it wouldn't.  

[grandmabee]

I agree on the HELCO loan you use tracing rules for what's deductible.  So if purchased rental then it's deductable

 

[Lee B]

This was discussed about a month ago.

What Judy is referring to is that the loan must be secured by the property purchased.

Example : Proceeds from a Heloc secured by primary residence used to buy second home. Under new rules this is nondeductible.

In effect, the old interest ruling rules will not always result in a deduction.

[jklcpa]

3 hours ago, GGRNY said:

However, I was under the impression that as long as the HELOC interest was used for rental property, then the interest would be deductible in 2018.  If it was used for personal, then it wouldn't. 

Please see the last sentence in example #2 on this page from the IRS where the agency posted this page in response to numerous questions on this subject:

https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

[G2R]

I agree, HELOC loan secured by primary residence used to buy a second home would not be deductible under the new rules because it's personal usage, however, I think if the proceeds are used to buy a rental property, even though the HELOC is on the primary residence and not secured by the rental property purchased, then the rental property can deduct the interest of the HELOC loan on the schedule E.  

Correct?

 

[Lee B]

Interesting question ?

Can Heloc mortgage interest, which is nondeductible on Schedule A be made deductible on Schedule E by converting a second home into a rental ?

We will find out eventually. Perhaps you can volunteer to push the envelope ?

[G2R]

I'd rather be the discreet mouse than a trailblazer when it comes to tax returns.  While I can't find it specifically stated on the IRS website (I think they are still trying to interpret their own laws for 2018), it seems many of my financial advisory websites agree this unique scenario would be acceptable.

Thank you everyone for your valuable insights! 

[jklcpa]

1 hour ago, GGRNY said:

I'd rather be the discreet mouse than a trailblazer when it comes to tax returns.  While I can't find it specifically stated on the IRS website (I think they are still trying to interpret their own laws for 2018), it seems many of my financial advisory websites agree this unique scenario would be acceptable.

Thank you everyone for your valuable insights! 

Sorry that the link I provided in my second posts was about vacation homes, and that does not apply to your client's situation.

While we are all waiting on interpretations of areas that are loose in the new TCJA, please consider the following when deciding whether you still think that this HELOC interest will be deductible, because it sounds like you want to treat this interest as acquisition indebtedness where some borrowing on home equity loans (as titled by the bank, to differentiate from home equity indebtedness that is a different issue altogether) will be considered home acquisition indebtedness IF the proceeds are used to buy, build or substantially improve the qualified residence and is secured by that residence.

A qualified residence under code sec 163 is the taxpayer's principal residence or one other home used as a residence by the taxpayer, and that would not include a newly acquired property to be used solely as a rental.   If the loan was for a property that was originally a second home and later converted to a rental, then that interest continues to be deductible under acquisition indebtedness, but a property newly purchased as a rental and never meets the requirement to be a qualified residence will not be considered acquisition indebtedness. If the rental's purchase came from the HELOC, it is clearly home equity indebtedness that will be nondeductible under the new law.  Under the old law pre-TCJA, that interest was deductible under the home equity indebtedness if it was below the threshold for borrowing, and was the reason I suggested capitalizing all the carrying charges that you can.    

 code sec 163(h)(3)(B)

Hope I got that right!

[NECPA in NEBRASKA]

I am also glad to see that my thoughts on this exact situation were actually correct. I warned my client that using a HELOC on his current home to purchase a rental house would not have deductible interest because of the new law in 2018. He did not like my interpretation and went ahead and did it. He will not be happy when he has his 2018 taxes prepared, unless he goes to someone else.

[G2R]

Judy, that is EXTREMELY helpful information.  Thank you so much for taking the time to explain this.  

 

[Roberts]

21 hours ago, GGRNY said:

I agree, HELOC loan secured by primary residence used to buy a second home would not be deductible under the new rules because it's personal usage, however, I think if the proceeds are used to buy a rental property, even though the HELOC is on the primary residence and not secured by the rental property purchased, then the rental property can deduct the interest of the HELOC loan on the schedule E.  

Correct?

 

I believe you are 100% correct. I agree with Judy that you don't have a rental, you have a Schedule C rehabilitation business and when they started renting it out it became a Schedule E rental. The interest is capitalized on the Schedule C - it's deductible in future years on the E. Tons of people (me included) take out HELOC or cash out first mortgages to pay for rental property because you get better interest rates and you can avoid a business plan.