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Old 04-18-2011, 07:49 PM
 
3 posts, read 7,052 times
Reputation: 11

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Need Advice on Renting/Selling Phoenix Property at a loss (AGI greater than 150K)
In 2006, we purchased a home in the greater Phoenix area for app $570K (with 20% down payment). Even though values dropped, we didn't want to do a short sale, so we spoke to an accountant who advised us to rent it out. We were told we'd be able to claim the loss on our taxes each year. We now live in another house and the renters moved in in December 2010.

The rent paid doesn't cover the whole mortgage and we make up the difference each month (app. $1,000). Last week we learned that because our AGI is greater than $150K, we will not be able to claim the rental loss.

Now that tax season is over, we are going to find a competent accountant who understands real estate taxes.

Zillow indicates the value of the house has dropped again and it's now worth $345K. So we've lost more than two hundred thousand dollars and if we keep the house it costs us a lot more than the difference between the mortgage & rent paid. There are also taxes, HOA dues, mtnce, etc., and of course, depreciation. All together, even if the house is always rented out, it will cost us an additional $24K each year.

Right now, my questions are:

1) If we decide to do a short sale, will the capital gains (or loss) be based on the original price we paid or fair market value?

2) Is depreciation based on the original price we paid or fair market value?

3) Does anyone see *any* advantage in keeping the house as a rental for a few years knowing we'll have losses (that can't be written off)?

Thanks for your thoughts while we look for a good accountant.
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Old 04-18-2011, 08:28 PM
 
4,819 posts, read 3,024,470 times
Reputation: 3613
Quote:
Originally Posted by Sam-Hill View Post
Need Advice on Renting/Selling Phoenix Property at a loss (AGI greater than 150K)
In 2006, we purchased a home in the greater Phoenix area for app $570K (with 20% down payment). Even though values dropped, we didn't want to do a short sale, so we spoke to an accountant who advised us to rent it out. We were told we'd be able to claim the loss on our taxes each year. We now live in another house and the renters moved in in December 2010.

The rent paid doesn't cover the whole mortgage and we make up the difference each month (app. $1,000). Last week we learned that because our AGI is greater than $150K, we will not be able to claim the rental loss.

Now that tax season is over, we are going to find a competent accountant who understands real estate taxes.

Zillow indicates the value of the house has dropped again and it's now worth $345K. So we've lost more than two hundred thousand dollars and if we keep the house it costs us a lot more than the difference between the mortgage & rent paid. There are also taxes, HOA dues, mtnce, etc., and of course, depreciation. All together, even if the house is always rented out, it will cost us an additional $24K each year.

Right now, my questions are:

1) If we decide to do a short sale, will the capital gains (or loss) be based on the original price we paid or fair market value?

2) Is depreciation based on the original price we paid or fair market value?

3) Does anyone see *any* advantage in keeping the house as a rental for a few years knowing we'll have losses (that can't be written off)?

Thanks for your thoughts while we look for a good accountant.
Owning rental property is a pain and unless you`re willing to be a hands-on owner it`s likely not worth the headache. As unpleasant as it sounds you might just have to sell and take the loss or continue to lose money each year. It`s going to take a few more years just for home prices to simply stabilize in the Phx metro and probably decades before they reach the heights of 2006 again.
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Old 04-18-2011, 09:09 PM
 
Location: Tempe, Arizona
4,511 posts, read 12,495,866 times
Reputation: 2197
Quote:
Originally Posted by Sam-Hill View Post
...[

Right now, my questions are:

1) If we decide to do a short sale, will the capital gains (or loss) be based on the original price we paid or fair market value?

It will be based on your cost basis in the home (original purchase price + improvement costs). You may still qualify for a capital gains exclusion if you lived in the home 2 out of the last five years, but it's likely you'll have a loss, so doesn't really matter.

2) Is depreciation based on the original price we paid or fair market value?

Based on value at time placed in service as a rental (see publication below).

3) Does anyone see *any* advantage in keeping the house as a rental for a few years knowing we'll have losses (that can't be written off)?

Talk to an accountant (preferably a CPA knowledgeable about rental properties and tax impact).

Thanks for your thoughts while we look for a good accountant.
You absolutely need to find a good accountant! You may need to file amended tax returns to fully take advantage of your growing rental losses. Among other things, you should be depreciating the property each year. Start here:

Publication 527 (2010), Residential Rental Property
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Old 04-18-2011, 10:28 PM
 
3 posts, read 7,052 times
Reputation: 11
john32 - agree renting can be a pain in the a** if it's not cash flow positive or with poor tenants. We've had a great tenant in place in Washington state for more than four years. Input = Output. The tenants in AZ are also great. BUT, we just didn't realize how upside down we'd be with an upside down mortgage and both of us working as hard as we do. If we'd made $149K we'd be fine.

rjrcm - thanks for the invaluable information. I'll check out Publication 527. We tried to show depreciation on this return but we made too much this year (not complaining, just saying'), but it may still be necessary to show if/when we sell. I'll read more about "cost basis" before we move forward.

We don't want to continue with an outlay each month and then learn the rental (WITH depreciation, etc.) would be penciled in as a gain.

Makes me think we should have walked away last year.
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Old 04-19-2011, 12:40 AM
 
Location: Tempe, Arizona
4,511 posts, read 12,495,866 times
Reputation: 2197
Quote:
Originally Posted by Sam-Hill View Post
.... We tried to show depreciation on this return but we made too much this year (not complaining, just saying'), but it may still be necessary to show if/when we sell. ...
Depreciation has nothing to do with what you make. You're confusing that with deducting losses, which has an income cap. Again, you need a better accountant.
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Old 04-19-2011, 04:01 AM
 
Location: Everywhere and no where
1,044 posts, read 1,005,616 times
Reputation: 1787
Real Estate Passive Loss Rules - Deducting Rental Income Losses

This is a pretty good overview of the passive vs active losses.

I'd advise you just sell the property and convert all of the losses into usable loss against your income. You will have a heck of an income tax refund.
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Old 04-19-2011, 05:26 AM
 
Location: Gilbert - Val Vista Lakes
6,069 posts, read 13,612,731 times
Reputation: 3859
Take rjrcm's advice and seek a good tax accountant. You may also need to consult a real estate attorney. This will give you the legal and tax advice that you need in this situation. In a forgiven debt situation, you do not get a tax write off.
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Old 04-19-2011, 10:02 AM
 
Location: Phoenix AZ
6,271 posts, read 12,521,829 times
Reputation: 10280
Or, you could get a real-estate license... there's an exclusion to the $150k rule for those in the field...

Walking away is a more realistic option, but you should look at all of them.. Perhaps you could meet the "RE professional" criteria if you were actively managing both properties yourself...
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Old 04-19-2011, 02:34 PM
 
3 posts, read 7,052 times
Reputation: 11
Quote:
Originally Posted by rjrcm View Post
Depreciation has nothing to do with what you make. You're confusing that with deducting losses, which has an income cap. Again, you need a better accountant.
rjrcm, yes, I meant deducting the losses. Depreciation was noted in the return for both properties, but didn't count this year.

john3232 - hadn't considered getting a RE license and something to ponder since we are actively managing the properties. But, it would also be a distraction from my own business.

Last year, we ran the numbers to determine how long it will take to reach the price we paid for the house in 2006. At a (conservative) 3% increase/year it would take 17 years!

Thanks, all, for your thoughts. I've gotten the name of a tax accountant and will seek out an attorney, too.
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