Thank you very much for the discussion - and the note on
Insurance Premiums not needing to be prorated. This helps
alot.

I believe I've finished all the appropriate forms. The
result was a passive activity loss that I can't take
advantage of this year but will carry over to offset 2006
passive activity gains...wahoo.

thanks again,
boattroy

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Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:
- quote -

$900,000

- quote -

Of course, in that example, in year 7 B had phantom income
of $900,000, which is taxable.

The usual method of handling it was to change accountants
that year and not tell the new one.

(I'm also not sure whether B got to depreciate the full $1
million, but the depreciation was capped at the at-risk
amount.)

(What would happen if that deal was 3 years old when the
at-risk rules came into effect? Could B finish depreciating
based on $100,000, or would he have to stop immediately due
to no remaining at-risk amount, or would he owe taxes on the
already excess depreciation?)

Seth

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L K Williams <lanny[at]loxinfo.co.th> wrote:

- quote -

I thought the at-risk rules didn't apply to [at least some]
ownership of real property.

Stu

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oatTroy[at]aol.com wrote:

- quote -

At-risk refers to debts for which you are personally liable.
Since you paid cash for your property, you cannot have
anything that is not at-risk.

The at-risk rules would apply if you bought the property
"subject to" an existing mortgage on which you have no
personal liability. That means that, if the lender
forecloses and does not recover his full loan balance, he
cannot come after you for a defeciency judgement. AFAIK,
this is very rare on individual properties.

BTW, you do not prorate insurance premiums. If you paid a
full year premium, you deduct the full amout. Unless you
are one of the exceptioal people who use the accrual method
of accounting, you include items in income when you receive
payment and deduct expenses when you pay them. This applies
to all your expenses, i.e. taxes, utilities, maintenance,
etc.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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BoatTroy[at]aol.com wrote:

- quote -

The at risk rules don't apply in this situation, because you
paid cash for the property.

It's about how much of your own money it is actually
possible for you to lose. Here's an example from the old
days.

A makes a movie for $50,000, and sells is to B for
$1,000,000. B agrees to pay $100,000 down and $100,000 in
seven years on a non- recourse note. Non-recourse means
that if B fails to pay, A can take the movie back but can't
sue B for any additional money.

B then takes this movie and depreciates it over seven years,
saving $50,000 per year on taxes for a total tax benefit of
$350,000. In year seven, instead of paying off the loan, B
gives the movie back to A.

B really only had $100,000 at risk, not the inflated price
of $1,000,000. So he should have depreciated the $100,000,
not the $1,000,000.

Stu

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Although I enjoy the challenge of reading through the IRS
publications and forms, I'm finally baffled by one - At-Risk
rules. I would appreciate any guidance you can provide.
I paid cash for a very small home on 6/28/2005 for rental
purposes.
I placed a rental sign in the yard on 7/1/2005.
I had renters approved and moved in on 7/15/2005.
At no time was a rental mgmt or other services company
involved.

This seems easy to me:
a) X amount of rental income
b) Y amount of expenses (AC repair, prorated insurance
for 6 mo.)
c) N amount of depreciation (found the depreciation
tables easy to use)
d) X-Y-N = a small loss

Although I see this as easy, the barrage of potential forms
is confusing.

Based on the information above, can someone ask me a
question that will trigger the lightbulb in my head to come
one or point me at a helpful set of rules or better yet an
example for determining "at-risk"?

Thank you,
BoatTroy

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