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Tax Planning/Investment Property Question



We are planning to do $25K in renovations to our investment property this year.  We are either going to fund this with a HELOC loan or by cashing in US savings bonds.  The face value of the bonds is about 1/3 of the current value, so we would be paying taxes on 2/3 of $25K ($16,666).

In deciding which way to go we're wondering what the tax implications would be if we are using the money to upgrade the rental unit.  I was told we could apply the tax amount on the 1099 towards the expenses of the rental unit.  If that's true, and we take a loss on the unit when we include the bonds taxes, would we offset those taxes?

Appreciate your advice!


Chris - There are several conflicting things within your question, but the best advice I can give you is to use the HELOC.  It is fully deductible since you are using it to improve the property and you will be able to depreciate the improvements over time.  The cost of the renovations might help to offset the income from the bonds OVER TIME, but not in the year in which you do the improvements simply because you would be taxed on the entire amount of the interest on the bonds but get very little in that first year to offset it.

I hope that helps.

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As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.


I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

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Enrolled Agent, Admitted to Practice Before the IRS, Accredited Tax Preparer, Fellow of National Tax Practice Institute, Certified QuickBooks ProAdvisor (1999-2011), Sleeter Group Certified QuickBooks Consultant, Life & Disability Insurance Agent License (California, Texas, Maine), Real Estate Agent License (California); Many years of continuing education in all these fields.

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