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emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3166
Experience:  IRS licensed Enrolled Agent and tax instructor
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We recently purchased an investment property that we intend

Customer Question

We recently purchased an investment property that we intend to rent out. It needs a sizable amount of renovation and we are
short of cash, so we intend on using California First, a California PACE (Property Assessed Clean Energy) lender. They
charge a high upfront and high interest (9+%), but it is our understanding that as it is paid via property assessment, it
is completely tax deductible. We understand that because of our income level, we can't deduct home improvements such as as
new furnace even though it is for a rental property.
Is our understanding correct, that it will be 100% deductible despite our income level and it being used for thing like a
furnace, energy-efficient windows, etc that wouldn't otherwise be deductible for us?
Submitted: 2 years ago.
Category: Tax
Expert:  emc011075 replied 2 years ago.

Hi. My name is ***** ***** I will be happy to help you.

Before the property is ready to be rented and advertised as such, the expenses are NOT treated as rental or business expenses, they are still personal. You can deduct mortgage interest and property taxes as personal on schedule A and all improvements will be added to the basis, along with purchase price and depreciated over 27.5 years. The loan itself is not deductible.

Customer: replied 2 years ago.
Thanks for the response. I'm not sure I understand your answer. The house isn't habitable currently (wiring, asbestos, etc), and won't be until the remodel ends, at which time it will be advertised for rental. We won't have lived in it or used it for ourselves at all. Would the property assessment that pays the PACE loan be deductible for business/rental at least once it's ready to rent?
Expert:  emc011075 replied 2 years ago.

Ok. PACE is a loan. Loans repayments are not deductible, only the interest. Just like your mortgage, you cannot deduct the entire mortgage payments, you can only deduct the mortgage interest. Same rule apply here.

You use the money from the loan to do improvements to your property. Because the property is not ready and available for rent just yet you cannot take any deductions. All improvements and all money you spend to make the property habitable and ready to be rented will be added to the purchase price, that's called basis of the property. When the property is ready you will use the basis (purchase price and all the improvements you made) to calculate your depreciation deduction. Rental property is depreciated over 27.5 years, which means every year you will be able to deduct about 3.63% of your basis (purchase price + all the improvements)

How the property or improvements are financed or paid for is irrelevant. The repayment of the loan will be done through your property tax payments. I am assuming you will get some type of statement that will show how much of it is nondeductible repayment of the loan and how much is deductible interest. Only the interest portion of the assessment will be deductible, because part of the assessment will be repayment of the loan, which is never deductible.

You are still offline. So if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.