Paid for property

10 Replies

A friend of mines has a house that is paid for and empty. I asked why not rent it out and they had no clue on how or what to do. I told them to come here but they are older and not into computers. So I will post a question for them.

If the property is paid off and they decide to rent it would they have to pay taxes on the rent collected?

Yes, you still have to pay taxes on any profit. The only real difference is that your friend won't have any mortgage interest to offset the income. Not a big deal though. It doesn't make any sense to leave a house vacant to avoid paying taxes, if that is his reason.  

Will,

As Kyle said, your friend will have to pay taxes on the profit.

HOWEVER, profit is calculated as follows:

Profit = Rental Income - Rental Expenses.

Rental Income = rents collected

Rental Expenses = property tax paid + property insurance paid + Depreciation + (other expenses spent on property like paying water bill, lawn mowing bill, etc..)

Depreciation = value of structure and contents (excluding land) / 27.5

Read up no what depreciation is....it is one of the major reasons why real estate investors exist.

Has your friend occupied it as their primary home recently?  If within the last 36 months, they may have a tax-free capital gain they are sitting on if they sell it.  If it is inherited property they acquired in the last year, they can sell for no 'profit' tax-wise.  A couple things to consider prior to just renting something out.  Congrats to them on having a paid for house!

wow thanks for the quick reply ...the house belonged to his parents and he only uses it once a year for a few days... I'll inform him of his options...he recently retired and living on a fixed low income but has this property just sitting there..

If they are older, then renting it out might be the best option. It would be silly to not rent it out at all just to avoid paying taxes. They'll still make money! Why not get property management to take care of the property, and keep it off their mind?

If they're younger and more spunky, why not sell the house and use the proceeds to make a down payment on a larger property? A $100,000 house could rent for $1,000/month, but what if you could sell it and buy a $300,000 house that would rent for $3,000/month? Cha ching!

If they're even younger, why not tap the equity with a HELOC or mortgage and use that money to make a down payment on a bigger property, and rent BOTH out? That equity is a gold mine!

@SkylerSmith He's older and just need a little extra cash..He's pretty content..I just  brought up the idea but he was worried about little things like what if the tenants don't pay what if they mess up the place and taxes..so I suggested I'll come on BP and show him around and if he has questions we will post...

Certainly not everyone is built to be or cares to be a landlord.  They could simply sell it and invest in high yielding (yeah, right) ETFs or munis or what have you in the paper securities (stock) market.  I have yet to hear from any of my paper investments, calling me about tenants or toilets!

Another option...try a management company. That way, he is out of the everyday picture of running the rental. He still has someone taking care of his investment without the headache of doing it himself. Sure, he has to pay a little...but it sure beats having the headache of being the so called "landlord". Just another thought

@Will Bert

Its so nice of you to be helping them out like this. The best advice I can give on any investment is the sleep test - will it keep him awake at night? Something that may not stress you out at all may make someone else break out in a sweat.

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