Calculating the cost of the apartment if I rent it out - need help! (rental, appreciation)

[LeoNYC]

First of all, I understand that any important tax related decisions and issues should be discussed with a CPA. However, before I pay the CPA I want to figure out whether my idea to rent out my condo makes sense.

We live in and own a condo in NYC and we want to move to a bigger place (will be renting). I believe that the value of our condo will increase in the a few years and would love not to sell it, even if I only break even or lose money every month renting it out. My main concern is whether I will be losing too much because of the mortgage, maintenance, taxes and other expenses. I am trying to understand how to calculate the approximate monthly loss after all the tax deductions and expenses are taken into account.

So here is the raw data for my apartment:

• Cost basis (can be used to calculate depreciation): 650K
• Maintenance: $600/month
• Local RE tax: $700/month
• Mortgage payment: $2800/month of which $2100 is deductible interest
• We are a married couple with one child in the 31% tax bracket
• Expected rent: $2700-2800/month

Question: How do I calculate the monthly cost of this apartment considering the above numbers, tax deductions and straight-line depreciation over 27.5 years (assume no other costs/deductions except the above)?

I am not looking for exact number. I just want to understand - roughly - how much it will cost me to keep this apartment, because I can see that I will probably be losing money on it every month - at least initially.

Thanks!

[Squirl]

I think you can do a 15 year depreciation, which should help your deductions...... other than that, I can add much value to your questions & will watch your post with interest.

[Poltracker]

I think you better look at your numbers. Your taxes may be going up (no longer 31% on income) and you may not be able to deduct your interest in the near future. You should also consider these possibilities when making a decision.

[LeoNYC]

Originally Posted by Poltracker

I think you better look at your numbers. Your taxes may be going up (no longer 31% on income) and you may not be able to deduct your interest in the near future. You should also consider these possibilities when making a decision.

Sorry, just want to understand what you're saying: why would my taxes be going up if my expenses associated with the apartment will be higher than the rent I will be getting?

I.e., my overall income will probably decline so the tax rate should not be higher. Also, the interest on the mortgage is an expense and can be deducted from the apartment income, isn't it? Or am I wrong?


By the way, I made a small typo in the original post but cannot edit it anymore. I meant to say, I am willing to break even or even lost some money every month, but wanted to understand how much I will be losing, approximately.

[DowntownVentura]

First of all, let me state, I am not an accountant or a professional tax preparer at all. I do my own taxes and research just what is needed for my situation. But I will throw some ideas around

In a nutshell, assuming 650k is your depreciable basis (it is the lesser of your cost basis and fair market value at the time the property is put into service as a rental). Your depreciated amount is just the improvement (building) not your portion of the land. For the sake of argument, let’s say it is 95% of 650k or $617.500

The amount you depreciate the first year depends on what month you put it in service (and there are some different methods that affect it slightly) but for the sake of argument, lets say it is put in service Jan 1 and divide $617,500 by 27.5 (the depreciation period for residential rentals is generally 27.5 years) and get $22,455/year depreciation

Your operating expenses are about $3400/month ($600+$700+$2100). (obviously, the interest does decrease slightly over time)

Your total deductions for the year are $63,255 ($3,400*12+ $22,455)

Your income for the year is $33,600

Your loss is about $30,000 for the year.

Unless you are a professional real estate investor, there is a big gotcha. You don’t get to deduct it all.

The most you can deduct each year is $25,000 and it reduces by 50ȼ for every dollar your AGI is above $100,000.

What happens to the amount you can’t deduct? The part you do not get a chance to deduct gets carried forward. See Passive Activity Limits here for more info Publication 925 (2009), Passive Activity and At-Risk Rules

[LeoNYC]

Originally Posted by DowntownVentura

Your loss is about $30,000 for the year.
Unless you are a professional real estate investor, there is a big gotcha. You don’t get to deduct it all.
The most you can deduct each year is $25,000 and it reduces by 50ȼ for every dollar your AGI is above $100,000.
What happens to the amount you can’t deduct? The part you do not get a chance to deduct gets carried forward. See Passive Activity Limits here for more info Publication 925 (2009), Passive Activity and At-Risk Rules

Thank you so, so much for this post! I really appreciate it. Since our combined family income is expected to be above 150K per year it seems that we cannot deduct anything at all, and we will be stuck with the loss for this apartment every year which means that as an investment it just does not make any sense. This really sucks I assumed that all the loses would be deductible against my overall income, but because of this "passive activity" rule that does not seem to be the case.

However, the actual loss (since I cannot deduct the depreciation amount) is expenses (3400*12) - rental (2800*12) which is $7200/year. Right?
What do I do with this depreciation if I cannot deduct it? Seems that it will simply accumulate over the years and will trigger a 25% tax on that "depreciation recapture" amount when I sell the apartment. So basically, my "real loss" from depreciation is 25% of the depreciation. Does it make sense?

[tworent]

Downtoun you beat me to it anyway Sorry with the numbers you gave you will lose your shirt

[DowntownVentura]

Originally Posted by LeoNYC

Thank you so, so much for this post! I really appreciate it. Since our combined family income is expected to be above 150K per year it seems that we cannot deduct anything at all, and we will be stuck with the loss for this apartment every year which means that as an investment it just does not make any sense. This really sucks I assumed that all the loses would be deductible against my overall income, but because of this "passive activity" rule that does not seem to be the case.

However, the actual loss (since I cannot deduct the depreciation amount) is expenses (3400*12) - rental (2800*12) which is $7200/year. Right?
What do I do with this depreciation if I cannot deduct it? Seems that it will simply accumulate over the years and will trigger a 25% tax on that "depreciation recapture" amount when I sell the apartment. So basically, my "real loss" from depreciation is 25% of the depreciation. Does it make sense?

I think I understand what you are saying. When you eventually sell, the capital gains is [proceeds - cost basis] . The cost basis is what you started with - depreciation + improvements. The tax rate is 25% of this gain. Since you have carryover losses, that is added to the cost basis so you in effect will get 25% of that "lost" deduction back. This, however, assumes your proceeds exceed your cost basis.

Operationally, from a cash flow point of view, you are a little worse off than you stated. Your expenses will include the amount of the loan going toward principal as well as you really can't get that until you sell or refinance.

Whether this is a good investment or not depends on what the appreciation of the property and/or the appreciation of the rent prices will be. Certainly it looks like you will run negative for a while.

[bentlebee]

In the end you can calculate how much you need for rent...but it all comes down to what the local rental market is...if you ask what you need to get is probably not the amount that any one is willing to pay....

Yesterday I spoke with a lady who wanted to ask $ 1300 for her rental while the current market value is aproxx. $ 875.- at the max. and for a seasonal $ 950.-.

Supply and demand....