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I suppose, once you do decide to convert from "primary" to rental , you are also adding capital gains into your expenses column, right?
Ideally you're not selling the investment property for a long time, if ever. By the time you sell the cap gains you have to pay will be worth it because of the appreciation and also how well the property(hopefully) cash flowed in later years.
If you end up selling in the short term, like 4-5 years then you will take a bath because you gave up the cap gains exemption and didn't hold long enough to make any real money.
Move into the house and live there for a few years to get around the exclusion or 1031 it.
They changed the rules(in 2009), you can't do that anymore. If OP rents it out for 5 years then moves back in for 2 years they won't qualify for the full exclusion. The capital gain will be prorated and they'll owe tax on 5/7 of it.
After accounting for all of the above, what kind of returns do landlords expect from their cash sunk into the property?
For e.g. Lets say I put in 100K for downpayment, and have equity worth 200K. After factoring in ALL COSTS and TAX BREAKS, how much do landlords get on their investment in the bay area ( thats where I am)
Let's see, you had a $100,000 down and now have $200,000 in equity. So you'd double your money if you sell.
If you rent it out your $200,000 in equity on a $700,000 condo might net you minus $700 a month in cash flow. If you consider the principal amount you pay off every month as your income or gains that are being reinvested, you'll probably get close to 3% on a year that is reinvested.
To even break even with cash flow, you're looking at 35% down on the original purchase price on a single family residences. Even more with a condo.
As far as "Tax Breaks" they are deferred taxes where uncle same hopes you pay him back at a later day at a higher rate. Even then, some of it goes away if you make too much money, so see a tax professional who is familiar with your current income situation.
They changed the rules(in 2009), you can't do that anymore. If OP rents it out for 5 years then moves back in for 2 years they won't qualify for the full exclusion. The capital gain will be prorated and they'll owe tax on 5/7 of it.
Yea, if you are going to sell, better do it before 36 months after leaving and don't move back in. Even if they rent it out for just a year and move back, they'll get hit with prorated taxes.
Keep in mind that Bankrate.com once had an article that stated one of the quickest ways to bankruptcy was to have one rental property. You really need several to make any money, or have a high end luxury unit in a place w/ lots of demand. Between maintenance, increased insurance costs, property taxes, possible damage due to tenants or normal wear and tear on the house, advertising costs, along w/ state and federal taxes if you do show a profit, it's often not worth the candle. Especially if you have trouble collecting rent, or some time in between tenants w/ no rental income coming in. This is why multiple rentals helps average things out. It also presents multiple problems though.
Obviously someone in the Bay Area or Hawaii has a better chance to make a little money because of the high demand for rental property and the amount of money you can get for that rental. But don't forget the lesson of the last housing bubble. What goes up must come down at some point. The rental prices in the two places I mentioned are unsustainable, and I sure wouldn't want to be caught holding a big mortgage when the prices drop, along w/ demand. And trust me, that will happen. It's not if, but when. Even if you are making serious money on the rental, the other factors I mentioned above are still in place, especially taxes and insurance costs. Be careful when selling too. Again, taxes, realtor fees and title fees always take out a big chunk of change, especially if you get hit w/ capital gains taxes. Now might be a good time to sell in the markets I mentioned. NO one should be in real estate w/ the intention of making a profit that is based on a 10 year from now guess. Doing back of the envelope calculations is one thing, actually renting or selling the property in the real world is another. Don't ask me how I know :}
Thanks for that solid advice.
I would do it only in certain circumstances.
Right now , i could not undertake it.
Perhaps is a few years. IF and only IF i have enough financial diversity, then i would consider it.
And even then, i will be cautious
Quote:
Originally Posted by smarino
Keep in mind that Bankrate.com once had an article that stated one of the quickest ways to bankruptcy was to have one rental property. You really need several to make any money, or have a high end luxury unit in a place w/ lots of demand. Between maintenance, increased insurance costs, property taxes, possible damage due to tenants or normal wear and tear on the house, advertising costs, along w/ state and federal taxes if you do show a profit, it's often not worth the candle. Especially if you have trouble collecting rent, or some time in between tenants w/ no rental income coming in. This is why multiple rentals helps average things out. It also presents multiple problems though.
Obviously someone in the Bay Area or Hawaii has a better chance to make a little money because of the high demand for rental property and the amount of money you can get for that rental. But don't forget the lesson of the last housing bubble. What goes up must come down at some point. The rental prices in the two places I mentioned are unsustainable, and I sure wouldn't want to be caught holding a big mortgage when the prices drop, along w/ demand. And trust me, that will happen. It's not if, but when. Even if you are making serious money on the rental, the other factors I mentioned above are still in place, especially taxes and insurance costs. Be careful when selling too. Again, taxes, realtor fees and title fees always take out a big chunk of change, especially if you get hit w/ capital gains taxes. Now might be a good time to sell in the markets I mentioned. NO one should be in real estate w/ the intention of making a profit that is based on a 10 year from now guess. Doing back of the envelope calculations is one thing, actually renting or selling the property in the real world is another. Don't ask me how I know :}
This is a bit premature but i was wondering about the pros and cons of converting our primary home to a rental property.
What all can be used to deduct against the rental income on taxes?
I know of property taxes , hoa dues, maintenance expenses, and depreciation.
What are the other things to weigh?
I just started renting my home (unfurnished 1 year lease) this year. You can deduct property taxes, but you do that anyway when you live in your house. I'm not sure if when renting it you get more of a deduction or not.
Yeah you can deduct maintenance expenses while the tenant is living there but it's not a dollar per dollar deduction. You might knock 20% off the cost of expenses maybe.
Depreciation? Yes.
And hopefully you saved all of your receipts over the years for things like a new roof, new copper pipes, sewage pipe upgrade, etc.
Overall the IRS is not friendly about deductions. For example painting the house or repairing a window to get it ready doesn't count towards anything. In the eyes of the government it's supposed to be painted and everything is supposed to be working anyway.
Then you have to factor in the cost of living somewhere else.
In my case, after taxes, write-offs and after paying to live at a cheaper place I am only making 43% of what my tenant is paying. And I'm renting a place for only 30% of what my house is renting for. Rather disappointing. Investing in stocks and bonds is a MUCH better investment when considering taxes. But if you have capital gains, selling your house might be a tax disasters. I've lived in my home for almost 20 years. At this point selling my house is not an option. I would get slaughtered by Uncle Sam. Financial advisers will tell you that being "house rich and cash poor" is a bad thing.
I recommend getting a copy of TurboTax and entering hypothetical numbers. It's confusing but people in the TurboTax forums are helpful. You can even call and speak to a tax expert.
Or are you thinking about doing the furnished vacation rental home thing on VRBO and Air BnB? If so I have a lot of input about that.
Last edited by Big-Bucks; 03-25-2016 at 02:42 AM..
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