Tax Questions

4 Replies

Posted under the wrong topic earlier today, sorry for those who have seen this.....

Pasted a copy:

Hi there I recently came up on this website after trying to find answers to my biggest question, should I rent my house and buy another house or sell my house and then buy another. I am affraid of renting my house because I am not sure how I will be affected when it comes down to tax season.

My givens:

  • Married
  • $185k combined annual income
  • Bought current house in December 2011for $302k in La Puente, Ca 91744
  • 3br, 2ba, pool 1363sqft house and 6,000sqft property
  • According to Redfin: Land taxable value is $137k and total house value 309k(house is worth 420k-430k at least after recent comp houses sold)
  • Property taxes paid in 2014 was $3,795
  • Refinanced March 2015 and Payment is now $1,637 (includes insurance and taxes) at 3.75%, 30yr loan
  • Current house estimated to be around 420-430k if I sell based on recently sold houses, owe 265k on loan to date.
  • Area comps show a average rent of $2,100
  • Reoccurring/maintenance cost: Pool is $90, Grass/plants is $100, Utilities is $340

My questions:

  1. Should I just sell the home now and collect $134k......(425k sell house x 6% agent fees) - 265k (Current balance)= $134k, not sure if it will not be worth it if I sell house in 10yrs assuming house value remains about same? I ask this because if I sell now I dont pay capital gains tax but later on I will in which I do not know at what percent I will be taxed?
  2. Based on my givens what items can I write off during tax time?
  3. If I understand correctly I can depreciate (307k-137K)/27.5?
  4. Can I deduct both items in question 2 and 3 during tax time?
  5. What are the tax implications if I rent home and decide to sell on year 10?
  6. How would I report the income from this home, do I report all the rent I am collecting such as ($2,100x12months) or do I report Net income after all landlord cost are factored in ($2,100x12months) MINUS Reoccurring/maintenance cost?
  7. If I decide to get a property manager can I write this cost off?
  8. Can I write off a home office and travel cost if I decide to manage the property when I buy another house?

My advice is to refinance it to a lower payment now, and then buy another house if you're in a good rental market.  If you're not what I would do is self it as long as you've lived there at least two full years of the last 5. You can lease it for up to three years as long as its sold before you hit the three year mark of having moved out.

I'd pass all of those costs to tenants.

1. depends upon what your investment choices are

2. All of your costs for the property including depreciation.

3. Yes

4. Yes.

5. Depreciation recapture maxed at 25% and then capital gain on the amount over 307k

6. Income - expenses - depreciation = net profit/loss

7. Yes.

8. Yes, you can provided you do things correctly. You may not need the home office. But travel to inspect the property, show it, repair items are all deductible.

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Honestly ask yourself a few questions.

- Do you have the temperament to be a landlord?

- Can you afford to have the monthly costs pile up for a few months if you have a vacancy or nonpaying tenant.  

- Do you think the housing market will continue to appreciate or depreciate?

- Compare the alternative uses of the money you would get from selling. Do you need the money from the sale of one house to finance the other, will you use it to reduce the amount you owe on the new house (which may relieve you of PMI expenses), will you use it to reinvest somewhere else, will you pay down other debts?

The tax implications of selling the property are certainly a variable to consider, but not the only one.

Obviously we are in a sellers market.  If your going to sell, now would be a good time before winter. Since its your primary residence, you keep the gains up to $250k, lucky you. On the flipside, because it's a sellers market you too will pay a higher price to buy now.

If your going to rent, in La Puente you'll likely be renting the house out to multiple families or multiple tenants. My guess is at least 5 people are needed to afford such rents. There will be wear and tear on the property. Get a management company if you plan to rent.

Based on your high income it seems like you can qualify for a new home while renting out your current home. If you rent it out you risk losing current market appreciation to the next downturn.

The game banks play is discriminatory by nature. Going back two years of stable income, high income, and a good down payment, and 75% loan to value equals a good credit risk. Banks don't take into account that circumstances may change. If you lose your income later, the banks don't care because the loan is in place.