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I feel like this topic was likely discussed before but I am unable to locate it by searching through this forum and the mortgage forum.
We are considering converting our current home into a rental property and using our home equity line to buy a 2nd home - to be our new primary residence - in another state. Has anyone done this? Do you recommend it? What are the financial implications - including taxes?
Our neighborhood's values are continually increasing and we are a couple years away from significant development that will most certainly have a very positive affect on the property value of our current (1st) home. That said, even though the rent we would charge will be higher than the mtg payment - what else I am forgetting to take into consideration? All I can think to add to it (to see if we are at least breaking even) is property taxes, maintenance and repairs once we go to sell.
I ask you all because I feel like if I go to my bank they will try to sell me on something rather than telling me what is truly best for me. My accountant charges for every call....
Mortgage Interest Deduction. I believe, since you are not paying interest on the mortgage of your primary residence, you will not be able to deduct mortgage interest from your taxes. Higher Interest Rate. it's more likely that the HELOC will be a higher interest rate than a new home loan for owner-occupied. In addition, you may be required to notify your mortgage company that you are no longer owner-occupying that home, which may change the terms of your HELOC. Capital Gains. How long have you lived in this home? If you have lived in the home for more than 2 years and convert to rental and don't sell within the next 3 years, you will not be able to take advantage of the break on capital gains 250k (500k for married) for sale of primary home (need to occupy for min 2 of the last 5 years).
Would the rent be more than the current mortg and the home equity combined? If you are out of state, are you willing to work with a property manager and pay them to manage the property for you? Do you have enough capital reserves to deal with a) maintenance issues and b) the periods when you won't have a tenant?
You won't get the capital gains exclusions break if you don't sell within the next 3 years, BUT you can do a 1031 when you sell and use the profits to purchase like rental property.
You won't get the capital gains exclusions break if you don't sell within the next 3 years, BUT you can do a 1031 when you sell and use the profits to purchase like rental property.
Shelly
Just be aware that 1031 is not capital gains exclusion, it is tax deferment. In the sale of primary residence, you can pocket the 250k (500k for married) without paying taxes on it. With 1031 exchange, you are not paying capital gains on it at the time of the sale, but when you eventually sell, you will need to pay capital gains on the full basis.
Jinxor is correct, however.... (there are always howevers and loop holes with taxes, aren't there?)
You can rent house A, and live in House B.. sell house A and buy condo C at the beach and defer your taxes while still living in House B, go a few more years and sell House B and take the captial gains exclusion and move into Condo C, live in Condo C for at least 2 years.. Sell Condo C and take the capital gains exclusion (you have lived in it for 2 of the 5 years)... go buy Dream Home D!!
**disclaimer** I am not a tax advisor. You are advised that tax rules can change at any time. Nothing is guaranteed in life except death and taxes****
**disclaimer** I am not a tax advisor. You are advised that tax rules can change at any time. Nothing is guaranteed in life except death and taxes****
Ditto. I'm not a real estate professional. I'm not a tax professional. I'm not a lawyer. This is not meant to construe any kind of professional advice whatsoever. The information is provided as-is with no warranties, implied or expressed as to the accuracy, reliability, or completeness. No rights are conferred. Your mileage may vary.
With soo many houses on the market right now, renting out your primary residence is making sense for people who have the equity to move on. You can take advantage of the great values in housing for your new place, without your property being sacrificed.
Also- don't forget the extra utilities that tenants don't usually pay- water and trash. If tenants of single family generally pay their own heat but make sure to include who pays what in the lease
In many cities-- maybe even most-- tenants customarily pay water and trash, in addition to utilities. A lot of times, they pay for general lawn maintenance, too. Everything is negotiable.
Jinxor is correct, however.... (there are always howevers and loop holes with taxes, aren't there?)
You can rent house A, and live in House B.. sell house A and buy condo C at the beach and defer your taxes while still living in House B, go a few more years and sell House B and take the captial gains exclusion and move into Condo C, live in Condo C for at least 2 years.. Sell Condo C and take the capital gains exclusion (you have lived in it for 2 of the 5 years)... go buy Dream Home D!!
**disclaimer** I am not a tax advisor. You are advised that tax rules can change at any time. Nothing is guaranteed in life except death and taxes****
Diito the disclaimer. Shelly - when you go to convert a property that was acquired in a 1031 tax-deferred exchange, you actually have to live in the home longer than 2 years (of the 5 . . . ) in order to have the capital gains exclusion. The IRS has really tightened up the requirements on that. I can't remember if it's 3 yrs or 5 yrs now, but watch for increased restrictions on the conversion in the future.
The other "out" on 1031 exchange eventual capital gains tax is to use the 1031 as an estate planning tool. Upon death the heirs would receive the property at the stepped-up basis and the heirs could sell the property at the new basis and not incur any taxes.
Back to the OP's question. Agreed, if you want to avoid capital gains tax, you would want to sell before the end of the 3rd year after moving out. As far as the tax benefits, you'd be able to claim the mortgage interest and taxes on your new home on Schedule A. You'd file a Schedule E for the rental property and be able to deduct that mortgage interest, taxes, repairs, depreciation, property management expenses, etc. on that form.
You really do need to talk to your accountant. There's recapture of depreciation when you sell a rental property, but there's a lot of tax deductions in the meantime. Only your accountant who knows your own particular tax situation is in a position to advise you.
We are also thinking of doing the same if we cannot sell this place. We already have a line of credit that we have never touched on the house and would use that as a down payment. We have lived in this house for three years. So what I am reading we could avoid capital gains on this house if we also sold it in three years?
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the heirs would receive the property at the stepped-up basis and the heirs could sell the property at the new basis and not incur any taxes.
