Rental property loan interest & fees

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

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?

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.

has more information.

Am I correct in

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.

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

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

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.

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.

(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.

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

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.

>>> has more information. >>

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.

>>>> has more information. >>>

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.