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Tax Planning/Rental Unit Renovations and Bonds

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Question
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!

Chris

Answer
Chris,
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.
RS

Tax Planning

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Richard S

Expertise

My expertise is in collecting past due taxes and tax returns. While at the IRS I worked on wage and bank levies, liens, Offer in Compromise, late filing and payment agreements every day. I spoke with over 20,000 people concerning their issues while I worked there (just retired).

Experience

Ten years working for the the IRS in Collections and tax return review. Worked with over 20,000 people on their IRS issues. Explained their options and usually worked out a solution while they were on the phone.

Education/Credentials
Masters Degree from Iowa State in Ames.

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