Back in 1996, Calvin purchased an old house for the family to call home. However, the real
estate market was not so good in Watterson and Calvin saw an opportunity. Instead of moving
into the house as their primary residence, Calvin and Susie decided to rent the house and buy a
larger house for themselves. The rental is in Watterson at 1212 2nd Avenue, while their main
home (where they still live in 2017) is at 6663 Main Street in Watterson. Calvin has been lucky
with the 2nd Avenue rental as he has only had two tenants in the entire 20 year period and no one
has ever been late with the rent. Calvin does all of the bill paying and rent collecting for this unit
but uses a handyman to do any repairs and maintenance.
During January 2017, Calvin saw another opportunity in real estate in his town and decided to
purchase an additional rental, but this time it was a 4 unit apartment complex at 8888 15th Street
2(kind of outside of town, but still close enough to visit if necessary and to collect the rent).
Calvin decided that with 4 tenants, he would use a property management company to take care of
screening tenants, collecting the rent and making repairs. Calvin, however, gets final say on the
amount of rent and whether he believes the prospective tenants are worthy of renting in his new
apartment building. Calvin takes care of paying all of the bills and just gets a rent check from
the property managers every other month.
In 2017, Susie convinced Calvin that it would be a good idea to buy some property in the
mountains. So after quite a bit of looking and discussion, Calvin and Susie settled on a
condominium in Squaw Valley, CA at a price of $350,000. So they could make the monthly
payments, and since they could not be there every day, they decided to use a rental company to
make arrangements to have the condo rented on days when they were not going to be there.
After the purchase of the condo, Calvin and Susie hired a contractor to do some re-modeling.
Susie really wanted to have a much larger kitchen area and had the contractor remove one of the
walls separating the kitchen and the living room. During the demolition, the contractor, who
happens to be Susie’s brother, Darryl, found a painting hidden inside the wall. Being an honest
fellow, Darryl, gave Susie the painting figuring it belonged to her now. Susie is an art teacher in
high-school so knew a little bit about art and decided to have the painting appraised by the
Antiques Roadshow when it would be in Sacramento. Turns out, the painting is an original
Jackson Pollock worth approximately $150,000 according to Susie’s other brother Darryl, who
happens to be a professional appraiser. The remodel, costing $75,000, was finished on July 15,
2017. Following is the list of attachments related to the rental properties:
Attachment 4: 2nd Avenue income and expenditures
Attachment 5: 2nd Avenue Fixed Assets
Attachment 6: Apartment complex details
Attachment 7: Squaw Valley Details
Calvin’s good luck in real estate ran out at the end of November, when he got a 1 a.m. phone call
from the police department on November 28th. Apparently, one of the tenants of the apartment
complex overcooked their turkey and started a fire in the kitchen. Because none of the other
tenants were home, and the person who started the fire decided to run instead of use the fire
extinguisher Calvin provided, the entire 4 unit complex burned to the ground with nothing left
other than ashes and the underlying land. Even worse, when Calvin went to make a claim with
the insurance company, he was told that no one had ever opened a policy on the apartment
complex. Calvin thought Susie had done it and Susie thought Calvin was doing it, so they had
no insurance on the apartment complex. Because the complex was a total loss and there would
be no insurance proceeds, Calvin decided to sell the burned out lot and closed the sale on
December 30, 2017 for sales price of the lot of $40,000.
Back in 1996, Calvin and Susie purchased their first (and current) home. They paid $450,000 for
the home and borrowed 80% of the purchase price from the local bank at 6% annual interest.
Over the last 20 years, they have managed to pay down the principle balance to $275,000.
Because interest rates are so low in 2017, Calvin decided to refinance the mortgage on the house
and pull out some additional equity cash to remodel the house and also pay for some non-house
related expenditures. The local bank agreed to refi the house for 80% of its current value of
$800,000 at an interest rate of 2% (simple) for 30 years. The refinance was completed on July 1,
2017. The refinance required that Calvin pay a 1.25% loan initiation fee to the bank upon
closing the refinanced loan. The points are NOT included in the interest paid on the form 1098.
The bank sent Calvin and Susie a form 1098 (Attachment 11) showing the following:
Principle balance at beginning of year $275,000
Principle balance at end of year
Interest paid during 2017
Property taxes paid during 2017
Susie kept careful track of where all the loan money went and provided the following summary:
Refinance of original mortgage
Points paid on the refi
Proceeds for remodeling
Money used for car wash asset
Calvin thought it would be a good idea to also pay his 2018 property taxes in December to get
the deduction, so he drove down to the County assessor’s office and paid another $6,857 on
December 31, 2017.
Calvin paid personal property taxes for the following items during 2017:
Purchase answer to see full attachment