Tax Planning/Rental Unit Renovations and Bonds
Good morning Mr. Stolp!
We are planning to do $25K in renovations to our rental 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 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!
No matter where the money comes from you can deduct the cost of improvements from the profits you received as rent. You may be able to carry some of the loss over into the next year. You might also check on the rate of return on the bonds, some earn for 30 years and the older ones still have good rates. If it was my choice - I would take the low interest loan and spread the payments out to equal the rent for those couple of years. If I had trouble making budget I would use the bonds as back up/emergency funds. Taking the loan keeps you from declaring the bond interest, at least all at once, and not being able to use all the improvement costs in one year.