Potentially renting out our condo (tenant, rental, deposit, house)

[Gunner0325]

We are kind of fed up with trying to sell and are considering renting out our condo. I think we could rent our condo out and get just enough to cover the mortgage and HOA fees with no financial gains, just enough to cover those fees. Do I need to create a seperate bank account for all rent transactions even if I will use the money to pay the mortgage and HOA fees? I read in one of the threads here that I should create an LLC? Does anyone recommend that? Are there ANY tax benefits for owning and renting out? Will I get taxed for the money coming in even though it's not profit at the end of the year? All I want to do is break even so I can pay the mortgage and HOA fees. We found a house we want to buy but want to at least have our condo rented out before we take on two mortgages...any advice?

[DowntownVentura]

Gunner, your questions are all good ones. Even though they are very basic, they answers are not simple.

You do not need separate bank accounts. I do create a new account for each rental, it just is easier for me but it is not required. (actually I create 2, a checking and savings) Some states do require you pay interest on the deposit. In that case, I would setup a separate account for that as the accounting will be simple and you can provide your 'receipt' without disclosing other transactions.

You will need to read up on LLCs to determine if it is right for you. If you have a lot of personal assets, it can limit those assets from a lawsuit regarding the rental. Some find having an HO6 policy with a high liability is adequate. LLCs are expensive to setup and renew. Only after you do research can you determine what is best for you.

The taxes are complicated (but not difficult). I would suggest hiring an accountant for this. Make sure he has real estate experience. It is possible to make an expensive mistake. I do my own taxes so it isn't impossible but it really took a lot of research.

[Gunner0325]

Originally Posted by DowntownVentura

The taxes are complicated (but not difficult). I would suggest hiring an accountant for this. Make sure he has real estate experience. It is possible to make an expensive mistake. I do my own taxes so it isn't impossible but it really took a lot of research.

Great info thank you! I guess my main question is, would I get taxed on the rent payments as if it was income coming in at the end of the year? Because I would not make money off renting for a good number of years, I would just use the money to pay off my mortgage payments and HOA fees. If I got taxed at the end of the year on the rent income I would be at a negative. I am not trying to make money right now on renting only to cover the costs. Or would I only get taxed if I made a profit off of renting which I wouldn't for a long time?

[suzy_q2010]

Originally Posted by Gunner0325

Great info thank you! I guess my main question is, would I get taxed on the rent payments as if it was income coming in at the end of the year? Because I would not make money off renting for a good number of years, I would just use the money to pay off my mortgage payments and HOA fees. If I got taxed at the end of the year on the rent income I would be at a negative. I am not trying to make money right now on renting only to cover the costs. Or would I only get taxed if I made a profit off of renting which I wouldn't for a long time?

I am a reluctant landlord, too. The property I am renting out has no mortgage, but after depreciation and expenses, I actually show a loss. You will get to deduct taxes, insurance, and the cost of repairs, too. Depending on the source and amount of other income, that loss can actually save taxes. That's why an accountant is a good idea.

[DowntownVentura]

Suzy is right

However, how you handle this loss is dependent on your situation. Here is the guide http://www.irs.gov/pub/irs-mssp/pal.pdf

To get a quick overview, google "passive activity loss"

But for now, until you get an accountant or finish your education, there are three dates you need to consider

1. The date on which you decide to make your unit a rental. this is either when you bought it (if you bought a property to be used as a rental) or when you moved out (which sounds like your case). You need a value of the property on this date. Any simple appraisal will do. You can even do it yourself by taking comparable sales in your area.

2. The date when the property is available for rent. This is frequently the same as the first date but can be later if you had some improvements you needed to do before it was available. You may need to prove this date in an audit. The most reliable way is to place a "For Rent" ad on a dated medium (even Craigslist) and copy it for your records.

3. The date a tenant moves in.

Keep records and receipts of everything you do regarding this rental. Keep track of every trip by car, note the date, miles, and purpose.

I suggest getting a book.. Go to a book store and start reading on rental income and taxes and see which book fits your style. Verify or clarify the information with Internal Revenue Service

[Gunner0325]

Very good information everybody thank you so much!