Newbie questions about buying/renting..... (documentation, investment, mortgage, mortgage)

[Fifty7]

Heyas,

Long time reader, first time poster. Just want to say thanks to everyone for all your informative info on City-Data.

I have a few questions regarding the renting out of my existing house in conjunction with the buying of a new one. I suppose that I am in the same boat as alot of other folks. Our family has grown this year with the birth of my son and we are looking to buy a bigger house in the next few years. I'm located in Central Valley, Ca and am currently upside down (of course) on my current home. We have been prepaying on the house for years now and with current rates I should be able to refinance in a year or 2 to a 15 year loan and be at a break even point or even a few hundred on the plus side as far as rental rates in my area (1100-1200 range). That said, my questions are:

1) If i were to sell it say in 15 or so years when it is payed off, what kind of penalties/taxes would I be looking at?

2) how would turning this into a rental affect me getting a loan for another house? would I have to put 20% down, etc..

Our thinking here is that we are going to need to move into a bigger place soon and instead of trying to sell I can rent it for the payment, get it payed off and eventually have this as alittle nest egg for my son's college fund in 18-20 years. The house is only 5 years old so maintenance costs will be minimal for so time. Any advice/ info would be greatly appreciated. Thanks..

[NinaN]

A CPA is your best answer to the tax question, but here's my understanding:

1). Assuming the tax laws stay somewhat the same for the next 15 years (HUGE assumption), you will have to pay capital gains taxes on the "gain" when you sell. Your gain is dependent on your basis (can be complicated with an existing home) and your capital expenses (save every receipt) and your depreciation for the rental business. Paying off your mortgage will have nothing to do with taxes on the gain.

2). Your mortgage broker is the best person to ask. They will consider rental income towards qualifying for a new mortgage, but not 100% of it. Also, the banks are getting penalized for lending to someone who does a "buy and bail" so they will ask for documentation on why you are moving and perhaps have you sign something stating your intent to rent it out. I have had 2 clients recently that rented out their place and were able to get an FHA loan with 3.5% down for a new house. Not sure if the rules have changed since then, but that's why you need to find a good mortgage broker to ask.

Good luck with your move!

[Fifty7]

Originally Posted by NinaN

A CPA is your best answer to the tax question, but here's my understanding:

1). Assuming the tax laws stay somewhat the same for the next 15 years (HUGE assumption), you will have to pay capital gains taxes on the "gain" when you sell. Your gain is dependent on your basis (can be complicated with an existing home) and your capital expenses (save every receipt) and your depreciation for the rental business. Paying off your mortgage will have nothing to do with taxes on the gain.

2). Your mortgage broker is the best person to ask. They will consider rental income towards qualifying for a new mortgage, but not 100% of it. Also, the banks are getting penalized for lending to someone who does a "buy and bail" so they will ask for documentation on why you are moving and perhaps have you sign something stating your intent to rent it out. I have had 2 clients recently that rented out their place and were able to get an FHA loan with 3.5% down for a new house. Not sure if the rules have changed since then, but that's why you need to find a good mortgage broker to ask.

Good luck with your move!

Thanks for the input! Quick question though........did your clients have there existing home rented for a period of time before they bought new one or was it at the same time? I have read that sometimes a person will either have to 1) show that the existing home has been rented for a period of time or 2) be able to qualify for both the property they are going to rent and the home they are going to buy or else they will have to apply for an investment loan even though the second home they buy will actually be the primary one but I not sure if this is true. Can anyone elaborate on this?

[NinaN]

The clients both moved from their house to the new house. They did both have another rental property, so maybe the lender counted that in their history. Neither had a lease signed before buying because it took a while to find something in their price range. Both got renters in their properties immediately after moving.