Tax Help: Rental Property

This is one in a series of tax questions from readers answered by local members of the California Society of Certified Public Accountants, to help with your 1999 and 2000 tax issues.

Q: I have been planning on selling a rental house I own to raise money to finance my son’s college education. Recently, however, the thought has occurred to me that I might be better off refinancing the property to raise the money. If I sell, I have to pay capital gains on the profit. If I refinance, I would get to write off the interest and return the property to a “paper loss” for tax purposes. I have had the property for more than 20 years, so it is fully depreciated, and without the depreciation deduction, it shows a small profit on my taxes. I am in the maximum tax bracket and will not be retiring or otherwise reducing my income (hopefully) for 15 years. The house is worth around $200,000 and the existing mortgage balance is $67,000. What do you think?

A: Refinancing the rental property would indeed free up money to fund your son’s education, but there are limits to how much interest you can deduct on a rental property. Because you are in the maximum tax bracket, you will be unable to write off a loss on your rental. The federal tax code has a “Ma and Pa” exception that allows middle-income taxpayers to write off up to $25,000 in rental losses, but that write-off begins to disappear when income reaches $100,000 and it disappears entirely at $150,000. Unused losses, however, can be carried forward to future years or until the property is sold; any unused losses would be deductible in the year of complete disposition. Any points paid to secure the refinancing would have to be amortized over the length of the new loan.

--David R. Flamer, CPA, Woodland Hills

To find a certified public accountant, visit https://www.calcpa.org. Questions and answers will also be posted on The Times’ Web site at https://www.latimes.com/taxes.