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Accounting/Tax Guys question (investment property) (1 Viewer)

offdee

offdee

Footballguy
I'm moving to the burbs and have a downtown condo that I will be keeping and renting as an investment property. Here's the situation...

- agreed upon rent of $1,375 provides me $65 per month of profit above my break even total

- parking is an additional $200 cost for renter (he will just be taking over my present parking spot I've been using, which I now no longer need) 

I have the choice to:

(A) collect the $1,375 per month from renter for rent only and then he pays the other $200 on his own directly to parking company. 

OR

(B) Renter pays me $1,575 per month for rent (with parking included) and then I pay parking company the $200 directly (so renter makes one total payment per month to me only).  But not sure in this scenario if it now looks like I make $265 per month profit on rent and I get taxed harder?

Wondering if either A or B is more advantageous to me come tax time or if it doesn't matter either way and is all the same in the wash. Thanks guys. 

 
How is $65/mo an investment?  Do you still have to pay property taxes and whatnot?  How about repairs and wear and tear to the condo?

 
Mrs. Rannous said:
How is $65/mo an investment?  Do you still have to pay property taxes and whatnot?  How about repairs and wear and tear to the condo?
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I'm sure he means he's making $65 after mortgage and taxes.  Obviously any repairs and maintenance he will have to pay for.

As far as the question in the OP, it does not matter.  The $200 if an expense you can write off.

 
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Much more info is needed (do you plan to take depreciation, what other expenses like repairs do you estimate, etc). To put such a fine  point on monthly profit ($65) feels a bit naive. In my experience, stuff happens. But anyway your examples are a wash because you can deduct the parking costs as an expense of the property. Personally, I'd leave the hassle to your tenant unless you are worried about it being in your name.

 
Has the property increased in value much?  If so, you may be better off selling it while it is still considered your primary residence (if you lived there at least 2 of the past 5 years) so you can receive the appreciation tax free.  Once you convert it, after a few years it is treated as an investment property and that appreciation will probably be taxed. 

 
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Mrs. Rannous said:
How is $65/mo an investment?  Do you still have to pay property taxes and whatnot?  How about repairs and wear and tear to the condo?
Click to expand...
$65 is profit after paying mortgage, condo dues, taxes, increased insurance, etc...basically its the profit per month after all of my expenses associated with the place. Correct though that repairs and wear and tear I would need to cover outside of that. 

More importantly getting a renter under 1 yr lease before closing on new house is a contingency on my financing for new house. Selling it within this short timeframe probably was unlikely.  So in that aspect it is worth it to make all that happen.  

Also will be nice to be able to use rental property as a tax writeoff source for things as we paint and do misc fixups in new house this first year. So some addl monetary benefits there as well. 

 
jon_mx said:
Has the property increased in value much?  If so, you may be better off selling it while it is still considered your primary residence (if you lived there at least 2 of the past 5 years) so you can receive the appreciation tax free.  Once you convert it, after a few years it is treated as an investment property and that appreciation will probably be taxed. 
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This is good info, thanks.  As noted in other reply I needed to rent now to make my financing on new house possible as not sure I would've been able to finalize a sale in this short window. 

But I'll need to decide my plan for the place after this one year of renting and what is more beneficial to me long term.  

If I want to rent long term I'd probably refinance to take home more monthly profit. Right now my interest rate on the place is 6% and know that's not good as rates are in the 4%'s presently

But you bring up a great point about selling and not get raped on profit taxes. If I move out on 4/1/17, what then would be my final deadline to sell before where I wouldn't get taxed on profits?

appreciate it!

 
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offdee said:
This is good info, thanks.  As noted in other reply I needed to rent now to make my financing on new house possible as not sure I would've been able to finalize a sale in this short window. 

But I'll need to decide my plan for the place after this one year of renting and what is more beneficial to me long term.  

If I want to rent long term I'd probably refinance to take home more monthly profit. Right now my interest rate on the place is 6% and know that's not good as rates are in the 4%'s presently

But you bring up a great point about selling and not get raped on profit taxes. If I move out on 4/1/17, what then would be my final deadline to sell before where I wouldn't get taxed on profits?

appreciate it!
Click to expand...
Assuming you lived there as your main home between 4/1/15 and 4/1/17 (two full years uninterrupted), then you need to complete the sale by 3/30/2020 (so that you lived there 2 of the past 5 years to qualify).

 
jon_mx said:
Assuming you lived there as your main home between 4/1/15 and 4/1/17 (two full years uninterrupted), then you need to complete the sale by 3/30/2020 (so that you lived there 2 of the past 5 years to qualify).
Click to expand...
Your assumptions are correct...lived there since 2007.  Perfect on that selling deadline date..gives me something to think about. Thanks. 

 
There's a housing shortage in the US and demand is exceeding supply in the rent market.  A lot of people I know in my neighborhood are kicking themselves for selling 2 years ago as prices are up 30-40% and rents up about 20-30%.

Regarding your original question, it makes no difference tax wise.  In reality, I would try to make the tenant pay it in his name.  That way if he skips or hits bad times, you're not required to pay for his parking space while you take the legal steps to get him out.

eta - Assuming that there's not a parking shortage.

 
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The $200 parking should be an expense so it shouldn't matter.  With that amount of profit, even including the parking, (relatively small), the depreciation of the condo itself is very likely to offset all of it.

I would roll it into the cost of the rent so that you keep full control of the parking spot.  This makes sure you don't fall behind on any of those monthly payments and you keep it tied in for future tenants as well.  Plus, for future tenants, what happens when they say they don't have a car or don't want to pay for the parking spot?  You going to let it go?  Roll it all in and advertise that it's included with rent and if someone decides not to take advantage of it, that's on them.

And, since this is new, just meet with a local tax person to discuss this to get the best advice, of course.  Even if you normally do your own taxes, it'll be helpful to have someone give you some feedback on how to do this so you get it done correctly.  The tax laws for landlords vary and can be complicated.

 
Mrs. Rannous said:
How is $65/mo an investment?  Do you still have to pay property taxes and whatnot?  How about repairs and wear and tear to the condo?
Click to expand...
Let's see, maybe the condo is rising 10-15% a year which over 3 years on a 100k investment would bring in over $30,000-$40,000 and then easily sold for a profit to go buy another property. Many times the rent doesn't put actual money in an owner's pocket. 

You could also pay 100k for the condo and then collect 15,000 in rent which is roughly 15% a year. How is that stock market avg over the last 75 years? 

Its a great investment potentially. 

 
Rental property will typically create a tax loss in the first several years due to the depreciation.  I used to suggest to anyone with money who would listen that real estate needed to be at least a part of their portfolio for this reason.  Having an asset that typically gains value where you can show losses in most years and then even kick the taxable gain down the road through 1031 exchanges is a seriously advantageous wealth creator.  Then if your kids inherit it, they can get the stepped up basis at the time of your death and sell it for little to no taxable gain.

However, if you want to sell in a couple of years, you will have to reduce your home sale exemption by that depreciation taken if you sell within the 5 year period.  The exemption is $250K for individuals and $500K for couples on the gain of the property sold.

Very roughly (there is more involved than this) but if an individual bought it for $500K, sold it for $700K ($200K gain), but took $100K in depreciation, they would be on the hook to pay taxes on $50K of gain. ($200K - ($250K-$100K) = $50K)

I'm not sure what your real numbers look like.  If we are talking closer to a $50K gain on a $150K property, then you don't really have much to worry about there and the exemption will cover whatever gains you may end up with.

 
Can I piggyback off this general topic of taxes/investment properties?

Wife sold a property that she had been renting out for 3.5 years, maybe slightly less (previously lived in it).  Sadly, just missed the primary residence cut-off.  The proceeds of the house were basically used for the down payment on our new primary residence.  Can we use section 1031 as a like-kind exchange for this situation to avoid/defer the taxes?

edit: the answer to this appears to be no.  Any other ways to reduce the tax burden at this point?

 
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