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Back in late 2011 I was just browsing on realtor.com and saw a house I really liked ... when it was still available a couple months later (early 2012) I went to see it. Long story short, I ended up buying it. I love the house and the lot and the neighborhood, so none of that is the issue!
I'd been living in a house I'd bought in 2003. That house is in the neighboring town and is only a couple of miles from my current house. Luckily I didn't need to sell that house in order to buy my current one, and I also had prospective tenants referred to me by a colleague, and the situation seemed great for both sides. And it HAS been -- they are wonderful tenants.
OK, that's the back story. It's now a year and a half after I moved out of the old house, so next spring I will be at the 2-year point in being a landlord. Because there are tax implications that kick in then, I am starting to think NOW about what I want to do: (a) keep being a landlord and hope I continue to get great tenants or (b) put the house on the market in January and hope it sells before May (it's in a nice neighborhood in a great school district -- the town has 6 or 7 elementary schools and the one in that neighborhood is considered the best or tied for the best -- but of course I have no idea how quickly it will sell).
There are several advantages to (a), keeping it as a rental. First and foremost, I would continue to build equity in that house while simply maintaining it; the rent covers the mortgage and there are tax advantages to being an active (not passive) LL -- e.g. I had a paper loss that I was able to subtract from the income from my regular job. Second, the "big stuff" at that house has been done -- e.g., new roof (that was a joy!! ), newer (and gorgeous) kitchen & baths (I did those when I lived there), new oil tank to use as a second source of heat with its oil furnace (it has a pellet furnace that is used most of the time, since pellets here are much cheaper than oil), etc. I HOPE this means that there's not a whole lot of major things that could go wrong. Third, the town has a strong rental market, so I will likely have good tenants to choose from, although again you never know. Fourth, I don't MIND being a landlord -- it takes a few hours a month of my time, but that's it, and I live close enough that I can go take a look at the house whenever I want. My old neighbors really like my current tenants -- if they decide to stay for another year, that would make my decision easier, as I would likely choose to stay.
Of course there are advantages to selling as well. I don't MIND being a landlord, but it would be great not to have to be. Given the current mortgage and a likely (albeit conservative) selling price, I would end up with probably $30-35k after all commissions etc., which would be nice to have.
Note, I have enough reserves that even if the rental house were unrented for a few months (again, not likely in my market), I'd be annoyed but not desperate. So that's not really in the equation.
There's a part of me that thinks it would be better to keep renting it out to feel like I am "amortizing" the pain of the new roof, but I realize that's not completely rational (e.g., the roof really needed to be replaced, and of course prospective buyers would have factored that in in making an offer!).
OK, I know I'm kind of all over the place in this post (can you tell I am ambivalent?). ANY advice would be appreciated, especially if you have info on some additional factors I should be considering in making my decision. Thanks!
I'd take the tax free money now. Something to consider , if you sold you old home could you buy a new rental using just the proceeds of the old home? The entry cost to buy a rental property, if you sell it , it might be difficult to buy another one.
You'd walk away 35k but what does that compare too? Lets call that 35k you equity in the property. Every year you make x$ this is your return on investment. Also you pay down some of your mortgage balance and build equity, but that equity can easily disappear with higher interest rates.
If you want the 35k did you consider a cash out refinance? With higher balance and refinancing do you still break even?
The roof thing is totally understandable but did you write of the expense in one year or or are you depreciating it have ? you taken that into consideration on your future sale scenario?
You haven't really provided enough info on the property value and how much equity you are building per year to compare with the 35k you are waking away with. Did your property go from 300 to 400k ? What was your original loan balance when you bought , when you rented it out , current.
I don't expect an answer to all these, but just reading this you may start to look at your rental from different angle.
Also if you are taking those paper loses you are deferring your taxes, they may come back around to bite you later.
Last edited by thelopez2; 11-09-2013 at 09:53 AM..
I'd take the tax free money now. Something to consider , if you sold you old home could you buy a new rental using just the proceeds of the old home? The entry cost to buy a rental property, if you sell it , it might be difficult to buy another one.
You'd walk away 35k but what does that compare too? Lets call that 35k you equity in the property. Every year you make x$ this is your return on investment. Also you pay down some of your mortgage balance and build equity, but that equity can easily disappear with higher interest rates.
If you want the 35k did you consider a cash out refinance? With higher balance and refinancing do you still break even?
The roof thing is totally understandable but did you write of the expense in one year or or are you depreciating it have ? you taken that into consideration on your future sale scenario?
You haven't really provided enough info on the property value and how much equity you are building per year to compare with the 35k you are waking away with. Did your property go from 300 to 400k ? What was your original loan balance when you bought , when you rented it out , current.
I don't expect an answer to all these, but just reading this you may start to look at your rental from different angle.
Also if you are taking those paper loses you are deferring your taxes, they may come back around to bite you later.
Hmmm, thanks for the reply, you've given me some more questions to ask myself.
For privacy reasons I won't answer all your questions, but suffice it to say I don't really NEED the $35k right now (it would just go in the bank -- I would not buy another property with it). I definitely don't want to do a cash out refinance and in fact I'm not sure any local bank (which are the ones I would want to deal with) would even DO that.
The roof cost is being depreciated (as far as I know I COULDN'T deduct it since it's a capital improvement, not a repair) ... I'm surprised at that question, if you are a landlord?
If I knew it would sell quickly, I would likely just sell, although that would inconvenience my tenants quite a bit and I don't really want to do that. The market here is AFAIK decent but not great -- as I wrote in the OP, the rental house is in one of the better neighborhoods in the town and those houses would tend to be faster sellers.
I may just ask a Realtor to come take a look and give me a current market assessment.
ETA: I also just realized that I have another year before the 2-out-of-the-last-5-years rule kicks in ... for some reason I ws remembering it as having had to live in the house no more than 2 years ago, but it's no more than 3 years ago. So this gives me more beathing room.
Location: Chapel Hill, NC, formerly NoVA and Phila
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We were recently in a similar position to you. We bought a house before selling our old one and rented the old one out for one year to great tenants. Our house had gone up in value quite a bit in the time we lived there so selling while we could still take tax-free gains was quite appealing. After our tenants moved out, we were quite undecided what to do.
As Lopez up thread said, you will need to look at more of the financial angle of the picture - how far along you are in your mortgage, if you expect housing prices to go up in the area, or whether taxes are expected to go up, where you can invest the equity in your home and how much you'd earn on it, etc.
Here's another point to consider: I spoke to an accountant about my situation, too because we weren't sure whether to sell or continue to rent. He said that I wouldn't have to pay capital gains on all of my profits when I sold the house if I decided to rent it out past the "2 out of 5 years time limit." He said I would only pay capital gains on the increase in worth from when it became a rental until it sold. I would double check on that with an accountant, if you decide to go that route.
Lastly, a third option is that you can rent it out and always move back for two years at the end of the rental if you need to.
For us, we ended up selling for 4 main reasons:
1. W had so much equity in the house that we were going to use on the downpayment of our new home but didn't, so financially we were a bit tighter than we wanted to be.
2. We were holding it on to it just in case we wanted to move back to that city, but after a year, we realized it wasn't realistic.
3. The market really heated up int he spring in the area, and we figured we should grab the bull by the horns so to speak.
4. Our house was older and we WERE scared that something big would go like the furnace while it was a rental.
Some of those cases don't apply to you. Glad you have an extra year to decide. That will help you make the right decision.
The roof cost is being depreciated (as far as I know I COULDN'T deduct it since it's a capital improvement, not a repair) ... I'm surprised at that question, if you are a landlord?
I'm just a humble computer guy. Not a LL or accountant trying to tell you how to do your taxes. If I could get away with repairing my roof versus replacing it, that is the route I'd take . Also to correct the last statement in my previous post, even if you don't claim the depreciation on your returns, you'll have to claim it when you sell. As far as amortizing the pain of the 'new roof' it can be used to offset the pain of having to pay taxes on you previous depreciation such as your kitchen, and other upgrades and repaid which you MAY have depreciated, which sounds like the case since you make note of active versus passive participation. If you already knew all of this I'm sorry for stating the obvious.
I'm just a humble computer guy. Not a LL or accountant trying to tell you how to do your taxes. If I could get away with repairing my roof versus replacing it, that is the route I'd take . Also to correct the last statement in my previous post, even if you don't claim the depreciation on your returns, you'll have to claim it when you sell. As far as amortizing the pain of the 'new roof' it can be used to offset the pain of having to pay taxes on you previous depreciation such as your kitchen, and other upgrades and repaid which you MAY have depreciated, which sounds like the case since you make note of active versus passive participation. If you already knew all of this I'm sorry for stating the obvious.
No need for humility -- you were helpful! Thanks!
I am just glad I have an extra year to think about it. What my current tenants decide to do (stay or go ... they're from Maine and may move back there) may help me make my decision, as the idea of dealing with BAD tenants is not good!!
I'm confused about these tax implications you're referring to. If you've been out of the house for two years then I would think you'd have a whole other year before tax implications kicked in. I believe (I am not an accountant so check with one) the tax rule says that you have to have lived in the home two years during a five year period in order to get the tax emption. So the 2 years you lived in the house + the 2 years it was rented is 4 years leaving one remaining year of eligibility.
As for the roof, (again check with an accountant) I would think if you put a new roof on it would be added to your cost basis when you sell. So, if you end up keeping the house past the 5 years I would put the new roof on as the expense will help to offset any realized gain.
Once again, I'm not a tax professional so before making any decisions please consult one.
I'm confused about these tax implications you're referring to. If you've been out of the house for two years then I would think you'd have a whole other year before tax implications kicked in. I believe (I am not an accountant so check with one) the tax rule says that you have to have lived in the home two years during a five year period in order to get the tax emption. So the 2 years you lived in the house + the 2 years it was rented is 4 years leaving one remaining year of eligibility.
Um, yes, this is what I wrote in post #3 yesterday -- see the bottom "ETA" part. For some reason I'd been remembering the "rule" as saying that you had to live in the house no more than 2 years ago, but when I was looking at some documents again yesterday, I realized I'd remembered wrong, which gave me an extra year (see post #6 talking about the "extra year").
Quote:
Originally Posted by MikePRU
As for the roof, (again check with an accountant) I would think if you put a new roof on it would be added to your cost basis when you sell. So, if you end up keeping the house past the 5 years I would put the new roof on as the expense will help to offset any realized gain.
Once again, I'm not a tax professional so before making any decisions please consult one.
Yes, it will be added to the cost basis. My point was more a psychological one -- i.e., it's hard to let go of a property when you JUST spent $15,000 (yep!!) on a new roof for it. (Roofs are insanely expensive up here ... I love New England BUT!!!) But again, I realize this isn't a rational reason for hanging on to the property -- and it should be a plus for selling of course!
Thanks for chiming in! I've read many of your posts since I joined C-D and you are always very helpful!
Yes, it will be added to the cost basis. My point was more a psychological one -- i.e., it's hard to let go of a property when you JUST spent $15,000 (yep!!) on a new roof for it. (Roofs are insanely expensive up here ... I love New England BUT!!!) But again, I realize this isn't a rational reason for hanging on to the property -- and it should be a plus for selling of course!
Thanks for chiming in! I've read many of your posts since I joined C-D and you are always very helpful!
Thanks Karen. I like to help people which is why I spend my time responding to posts here. It's also a big reason why I'm in the real estate agent profession. None of the other jobs I've held actually helped anyone at least in a way that I could see directly like this.
As for your roof . . . yes a good roofer around here is quite expensive. I moved last year and one of the houses I looked at needed a new roof. I was quoted about $10K for the job from one of the better roofers in the area. It's definitely hard to part with a home from a psychological standpoint after investing so much money in it, but you've also added value to the home and made it easier to sell as you mentioned. However, there is no single home improvement which will add value to the home equal to the amount of cost involved in making the improvement. So, better to avoid making the improvement if you can. Also, how do you know that the color roofing shingle you put on will appeal to every buyer? It's often better to sell the house in it's current condition at market price rather than risk turning off potential buyers by making improvements that don't appeal to them.
In general I wouldn't want to be a landlord today. Sounds like you have had good tenants.
All it takes is one to completely destroy the property.
But good luck.
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I love the house and the lot and the neighborhood, so none of that is the issue!
), newer (and gorgeous) kitchen & baths (I did those when I lived there), new oil tank to use as a second source of heat with its oil furnace (it has a pellet furnace that is used most of the time, since pellets here are much cheaper than oil), etc. I HOPE this means that there's not a whole lot of major things that could go wrong. Third, the town has a strong rental market, so I will likely have good tenants to choose from, although again you never know. Fourth, I don't MIND being a landlord -- it takes a few hours a month of my time, but that's it, and I live close enough that I can go take a look at the house whenever I want. My old neighbors really like my current tenants -- if they decide to stay for another year, that would make my decision easier, as I would likely choose to stay.
