Rental Property Advice

Jinx

when in doubt, upgrade!
Location
So Jordan, Utah
are you moving out of it to a new house? if its your primary residence now your tax liability is different than 2 years from now when its been a rental if you ever decide to sell if you have any equity in it.

Help me understand this. Yes, I am moving out of a house I have owned for 10+ years...
 

Pike2350

Registered User
Location
Salt Lake City
Help me understand this. Yes, I am moving out of a house I have owned for 10+ years...

Tax code states that if you sell a house that you lived in for 2 years out of the last 5, you can walk with upwards of $500K in profit if you are married or $250K if you are single. So, in 2 years, your tax liability will instead go to a capital gains style. You would set up your tax basis on the market value at the time of "putting it in service" and then if you were to sell the property you'd owe taxes on the difference of sale price and the depreciated value on taxes

So for now (and within the next 20 months or so) you can sell the property and take the profit and run (assuming it's not over the $500K), whereas in 2 years you will have to pay taxes on the profit as capital gains.
 

Jinx

when in doubt, upgrade!
Location
So Jordan, Utah
Tax code states that if you sell a house that you lived in for 2 years out of the last 5, you can walk with upwards of $500K in profit if you are married or $250K if you are single. So, in 2 years, your tax liability will instead go to a capital gains style. You would set up your tax basis on the market value at the time of "putting it in service" and then if you were to sell the property you'd owe taxes on the difference of sale price and the depreciated value on taxes

So for now (and within the next 20 months or so) you can sell the property and take the profit and run (assuming it's not over the $500K), whereas in 2 years you will have to pay taxes on the profit as capital gains.

Great information!
 

joshbmx1201

UAV MECHANIC
Tax code states that if you sell a house that you lived in for 2 years out of the last 5, you can walk with upwards of $500K in profit if you are married or $250K if you are single. So, in 2 years, your tax liability will instead go to a capital gains style. You would set up your tax basis on the market value at the time of "putting it in service" and then if you were to sell the property you'd owe taxes on the difference of sale price and the depreciated value on taxes

So for now (and within the next 20 months or so) you can sell the property and take the profit and run (assuming it's not over the $500K), whereas in 2 years you will have to pay taxes on the profit as capital gains.

exactly
 
R

rockdog

Guest
Find a good attorney!! Get ready to buy him a new Harley! Get used to it! Ok, I think I've about covered it.
 

DToy

Registered User
Location
Lehi
Help me understand this. Yes, I am moving out of a house I have owned for 10+ years...

Say what? Sounds like we need to find a night to take the wives out to dinner so you can give us the details. My advice, use a good contract...I can give you a copy of the one I use. Require a healthy deposit. Inspect the property often. Don't do anything nice for the renters with the expectation that it will ever be reciprocated or appreciated...it won't. Follow the contract and make them tow the line, don't give in an inch. Try to find a tenant that is handy. If they can't even change a lightbulb on their own you don't want them. All of the problems will arise when you're at work or busy and they expect you to drop everything to cater to them. They're not your friends, and they'll turn into mortal enemies whenever money is involved. All that said, we're renting out our house for a long-term, diversified retirement plan. So far we've been lucky overall.
 

Jinx

when in doubt, upgrade!
Location
So Jordan, Utah
Say what? Sounds like we need to find a night to take the wives out to dinner so you can give us the details. My advice, use a good contract...I can give you a copy of the one I use. Require a healthy deposit. Inspect the property often. Don't do anything nice for the renters with the expectation that it will ever be reciprocated or appreciated...it won't. Follow the contract and make them tow the line, don't give in an inch. Try to find a tenant that is handy. If they can't even change a lightbulb on their own you don't want them. All of the problems will arise when you're at work or busy and they expect you to drop everything to cater to them. They're not your friends, and they'll turn into mortal enemies whenever money is involved. All that said, we're renting out our house for a long-term, diversified retirement plan. So far we've been lucky overall.

Ya the difference in what I owe and what I can get would be nice but it hard to walk away from something that has been the design for a while.

You have been pretty lucky, I agree. I hope someone will watch over mine like they/we watch over yours. :)
 

Cody

Random Quote Generator
Supporting Member
Location
Gastown
btw even having just one rental is a fabulous investment at tax time, its all about the money.

I'm not sure I follow this; maybe you can help? As I understand it, there is no situation where you pay interest on an amount of money you borrow, and come out ahead because you can avoid taxes on that percentage of your income. The interest is always (because of a linear relationship) substantially greater than the tax savings. ...

If you spend x amount of money on interest in a mortgage, say 10k in a year for a round number, you can write off 10k on taxes. If your effective tax rate is 20%, you spent 10k in order to avoid 2k in taxes. I think I would rather collect my 10k (and maybe even put it in an interest bearing account, just saying), pay my 20% cut to the government, and have 8k left over to spend on hookers, blow, and kingpin 60's.

Paying 3.5-5% in interest on a property that probably won't grow more than 0 to 1% per annum over inflation (.39% over 30 year periods historically since the depression), just so you can use the interest to not pay taxes on a portion of your income, is, um, well, not a good growth strategy. The positives of rental properties come from positive cash flow above your cost of money over a period of time, not from asset growth over time (since inflation and mean real estate growth are so close) , and not from a write off on taxes (which is only making the offense of interest less offensive by lessoning the burden on tax day). This is why houses are not typically "investments", but rather savings account that grow at roughly the rate of inflation, but you pay 1.5-2x's the rate of inflation in interest for the right to have. Home ownership has it's perks, but if your end game is to grow your net worth, then there are substantially better ways to go about it. The write off on a rental property only lessons the pain of the interest you had to pay someone for the money they lent you to buy it.

But, I'm no accountant, and I stand to be corrected.
 
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ricsrx

Well-Known Member
your right, your math calculation is spot on, i don't know what i am talking about.
 
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jeeper

I live my life 1 dumpster at a time
Location
So Jo, Ut
What cody is not including is the depreciation you get to take on the property each year for your taxes.

Also:
While it may be correct that your money could grow better in another form of investments, how many of you have $200,000+ in cash to invest??

I've got about $750K in property that someone else is paying for, plus giving me some cash for the opportunity THEY have to pay the interest for me. In addition, due to the tax benefits I get, I have never paid a dime in taxes (even as a self employed person). In fact my returns are usually in the $5-8K range. For not paying a dime in, that's a good chunk to get out :) (however, I do think it's retarded, and a messed up system)

So, If you've got a way to earn 10% on hundreds of thousands, go for it. but If you only have time and energy, let someone else pay your retirement for you.


Edit:
Also Also:
Saying homes are not investments is silliness. Your own personal home is not, that's for sure.. but homes that you purchase over a 15-30 year period with someone else's money is a 'saving's account' that someone else pays for. The out of pocket cash is minimal compared to future profits. Further more, only a moron buys a home at full value and expects to make money off it as an investment. Homes can be purchased with large equity positions in place, making the 'investment' aspect much more real. The last home I bought, we spent about 5K in costs and repairs and could have sold it the next week for a $60K profit. I cold sell it now for about $65K more than I paid, and have received about $350/month in extra income from it for almost 2 years now. ($7500ish in my pocket). The tenant has paid the mortgage down a bit as well, adding to my equity.
Houses are great investments..
 
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Pike2350

Registered User
Location
Salt Lake City
What cody is not including is the depreciation you get to take on the property each year for your taxes.

Also:
While it may be correct that your money could grow better in another form of investments, how many of you have $200,000+ in cash to invest??

I've got about $750K in property that someone else is paying for, plus giving me some cash for the opportunity THEY have to pay the interest for me. In addition, due to the tax benefits I get, I have never paid a dime in taxes (even as a self employed person). In fact my returns are usually in the $5-8K range. For not paying a dime in, that's a good chunk to get out :) (however, I do think it's retarded, and a messed up system)

So, If you've got a way to earn 10% on hundreds of thousands, go for it. but If you only have time and energy, let someone else pay your retirement for you.


Edit:
Also Also:
Saying homes are not investments is silliness. Your own personal home is not, that's for sure.. but homes that you purchase over a 15-30 year period with someone else's money is a 'saving's account' that someone else pays for. The out of pocket cash is minimal compared to future profits. Further more, only a moron buys a home at full value and expects to make money off it as an investment. Homes can be purchased with large equity positions in place, making the 'investment' aspect much more real. The last home I bought, we spent about 5K in costs and repairs and could have sold it the next week for a $60K profit. I cold sell it now for about $65K more than I paid, and have received about $350/month in extra income from it for almost 2 years now. ($7500ish in my pocket). The tenant has paid the mortgage down a bit as well, adding to my equity.
Houses are great investments..

True.

There are a lot of variables that go into real estate investment when it comes to tax time...and how they are "good tax vehicles" The biggest is being able to write off other "normal" stuff. When you have a rental, you can now legally write off your cell phone bill....etc. Also, even if you have to put a little money in each month it can still be a very valuable investment long term....however, as many have stated in this thread, that can come with some serious headaches....but it's not like investing in the stock market is a solid, guarunteed investment either.

I will expand a little on Jeepers figures.

Suppose you buy a rental house with 20% down. For simplicity sake let's say it's $100K. You put down $20K for it...and the mortgage is $750/month piti (principal, interest, taxes & insurance) Let's say the rental value of the place is $725/month....again, not ideal, but just bear with me. Youl would be losing $25/month to keep the property going....that's $300/year. Let's also assume that every 5 years you have to dump $2K into it to clean/fix it up. That means, that after 30 years, you will have had to "pay" the following:

Down $20,000
Yearly losses $ 9,000
Repairs $10,000

After 30 years, you'd have paid almost $40K out of pocket. However, during that time, not only did you get the tax deductions from depreciation, interest, repairs, etc....you now have an asset that is worth $242,000 (assuming 3% annual inflation) While that's not a ton, it's not bad for a $40K investment....not to mention that after 30 years, you'd actually be making the full $8700/year in rent now....and that's assuming that rents never went up to cover inflation.

To compare this to a "interest calculator" if you were to invest the same $20K in something and then the $25/month into something that made 8% return annually, you'd have $236,700 after 30 years....granted that doesn't take into account the extra $10K that would be put in over time to boost the figure...but I'd consider that all a wash among the writeoffs from a rental....and at that point, you'd not be getting the $8700/year now.
 
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jeeper

I live my life 1 dumpster at a time
Location
So Jo, Ut
True.

There are a lot of variables that go into real estate investment when it comes to tax time...and how they are "good tax vehicles" The biggest is being able to write off other "normal" stuff. When you have a rental, you can now legally write off your cell phone bill....etc. Also, even if you have to put a little money in each month it can still be a very valuable investment long term....however, as many have stated in this thread, that can come with some serious headaches....but it's not like investing in the stock market is a solid, guarunteed investment either.

I will expand a little on Jeepers figures.

Suppose you buy a rental house with 20% down. For simplicity sake let's say it's $100K. You put down $20K for it...and the mortgage is $750/month piti (principal, interest, taxes & insurance) Let's say the rental value of the place is $725/month....again, not ideal, but just bear with me. Youl would be losing $25/month to keep the property going....that's $300/year. Let's also assume that every 5 years you have to dump $2K into it to clean/fix it up. That means, that after 30 years, you will have had to "pay" the following:

Down $20,000
Yearly losses $ 9,000
Repairs $10,000

After 30 years, you'd have paid almost $40K out of pocket. However, during that time, not only did you get the tax deductions from depreciation, interest, repairs, etc....you now have an asset that is worth $242,000 (assuming 3% annual inflation) While that's not a ton, it's not bad for a $40K investment....not to mention that after 30 years, you'd actually be making the full $8700/year in rent now....and that's assuming that rents never went up to cover inflation.

To compare this to a "interest calculator" if you were to invest the same $20K in something and then the $25/month into something that made 8% return annually, you'd have $236,700 after 30 years....granted that doesn't take into account the extra $10K that would be put in over time to boost the figure...but I'd consider that all a wash among the writeoffs from a rental....and at that point, you'd not be getting the $8700/year now.

I follow you here.. but at the end of 30 years, if you had $236K in saving, and could get an 8% return, you would pocket $18,880/year. That is well over the $8,700 in rents. However, if you had a property worth $242K as stated, rent should be a lot closer to $1400.. Making $16,800 in rents/plus tax benefits.

So again, it's not far superior to other investments. But it sure does make a good vehicle of other options are not appealing. Being smart about how and what you buy can maximize profits also..
 

Pike2350

Registered User
Location
Salt Lake City
I follow you here.. but at the end of 30 years, if you had $236K in saving, and could get an 8% return, you would pocket $18,880/year. That is well over the $8,700 in rents. However, if you had a property worth $242K as stated, rent should be a lot closer to $1400.. Making $16,800 in rents/plus tax benefits.

So again, it's not far superior to other investments. But it sure does make a good vehicle of other options are not appealing. Being smart about how and what you buy can maximize profits also..

Agreed....but as I said I didn't take into account any rental increases...so in reality, you wouldn't have to even invest near the $40K to get that return...and would likely have come close to pay yourself back the original $20K during the 30 year term. Rents would go up yearly (let's say by 3%) so even though intially you are losing $25/month, it would only take 2 years to stop having to put the $25/month in....and start pocketing a little $$$.

My figures were very simplistic...and no, it's not a FAR superior....the biggest problem being liquidity...but as far as return, it's usually more solid then the stock market....just look at 2008 as an example of that....granted, with a lot of research and intuition, you can minimize the risks on the stock market, but same can be said with a rental.
 

Jinx

when in doubt, upgrade!
Location
So Jordan, Utah
I love the discussion in this thread!

You guys are awesome, I was really hoping for the good and bad side of things.

Keep this going!
 

Cody

Random Quote Generator
Supporting Member
Location
Gastown
Now the heavy hitter finance guys are here. Good stuff.

What cody is not including is the depreciation you get to take on the property each year for your taxes.

sure, and there are other things I'm sure I'm missing as well. We also have to remember that owning a property, rental or not, for 30 years also means at some point you'll need to go through some of the larger expenses. Roofing, HVAC, water heaters, flooring, remodels etc etc. It's a pretty complex thing once you start adding all of that in there and figuring inflation and interest rates, depreciation, etc. I admit that I have an incomplete grasp on all of the different variables involved.
 

comingdown

Active Member
Location
Orem, UT
My parents own rental property, my grandparents owned rental property, and my great grand parents owned rental property. I currently have a house i rent out as well as an apartment in my basement. my house rents for nearly double my mortgage payment, and my basement is over half of that mortgage, so between the two of them, i make a 100 bucks and live with no house payment so to speak. My wife and i plan to continue to get a house every 1-2 years, we move into it, live there 12-24 months, fix it up while living there, and move on and rent it out. trusting your gut is the bets way to find good tenants, although it is not perfect. you have to realize that tenants with some exceptions are going to be flakier then people who want to buy a house, or who can buy a house. We handle everything ourselves and do not do any back ground checks, there are red flags to look for and we call all the the references they list and rake them over the coals to see who we are dealing with. It is not perfect, but in my opinion, the benefits outweigh the drawbacks. I plan to do this and it will be a long term deal. I do plan to diversify to other investment for my retirements, but this will be the main one. we keep 2 months of expenses on hand right now, but plan to move it up to 6 as soon as we can, which will cover major expenses. I shop KSL and other places for used appliances to help keep my costs down, and do all repairs myself. As some have said, it is not for everyone, but we enjoy it. i grew up turning over apartments and houses, painting, doing water heaters, and roofs. You need to research how depreciation works. you can depreciate the house, and any major repairs. I.e. if you do a roof, you can not write that expense off, but you are able to depreciate it over so many years, so it is a nice tax break as well. I recommend finding a good accountant for sure, and possible a lawyer, although prayer you never have to use them. Good luck, this thread was great. I think having rentals are the best thing that i have ever done, but it definitely inst for everyone. My parents have had some awful tenants, but those were honestly ones he did as a favor, be it through church or friends of friends. he had a bad feeling, but just shrugged it off, and paid for it. trust your gut, you don't owe anyone a favor. nice guys end up with awful rental experiences. i had a brand new stamped concrete sidewalk poured at house while i lived there and within a few months, they (the tenants) had laid something down and spray painted on it. i said, well, you just lost your deposit unless that looks perfect before you leave. but, they are tenants, you have to expect things like that.
 
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