I own a rental property that isn't making any money. My AGI is too high to be able to deduct the losses I'm incurring from it. Any ideas on what I should do?
The property is a townhouse, and was purchased new in 2004. Cost was ~$150K. The mortgage was a balloon ARM. I lived in it until 2008. I tried to sell it, but best offer was $120K so I kept the property and started renting it out. I hired a property manager.
In 2009, I refinanced the mortgage, a 30 yr fixed at 5.875%. The bank charged a higher rate because it was an investment property.
In 2010, I earned $10700 in rent. My costs were: mortgage interest $6400, depreciation $4400, association fee $1300, property tax $1900, property manager fee $750, liability insurance $160, other misc costs such as repairs, maintenance, etc $190. My overall costs were $15100, so I lost $4400 on this rental property in 2010. My losses in 2008 and 2009 totaled $7400.
I currently owe ~$107K on the mortgage.
My AGI in 2010 was ~230K and will likely stay the same or slightly increase in years to come.
Should I sell the rental property? I'm not sure what I could sell it for in this market, but I'm guessing it could fetch at least $120K. I doubt I could sell it for more than what I paid ($150K) anytime in the next 10yrs. How would the depreciation and the sell price affect my taxes after I sell the property?
OR, should I pay off the mortgage, and start earning income on the property? I have enough cash to pay off the entire mortgage right now. Paying off the mortgage would result in about $2K income per year from the rental property. Can I deduct previous years' losses against this income?
OR, should I just continue as is, losing money on the property every year? Is there any advantage to this? Should I refinance again? Since I last refinanced, rates have come down even more, and maybe if I shopped around more, I could get a better investment property rate. But there are always refi costs (not only dollar amounts, but significant amounts of my personal time).
I stated on my 2008, 2009, and 2010 tax returns that I did not actively manage the property, so I did not deduct any of the rental property losses off my personal income. Had I stated that I was actively managing, in 2008 and 2009 I could have deducted some or all of the losses off my personal income. My 2008 AGI was $52K, and in 2009 it was $110K. In 2010 my AGI was too high to matter if I was actively managing the property or not. I'm not sure what it means to be actively involved or not. I approve the rental rate, the tenant, and any major expenses. I pay the mortgage, association fee, property tax, and liability insurance. Otherwise my property manager takes care of the rest. Am I actually actively involved in the property management? Should I amend my previous tax returns to get some money back? My job is in health care, not related to real estate at all.
Thank you so much for any input!
Why do you count depreciation against your costs?
Roughly, you collected $10700 in rent payments and paid out $10700. That's breaking even (I omit any other numbers and assumptions for the moment).
PS If you fire a PM, you will keep $750.
I agree with George, you are breaking even. Depreciation is just a tax offset for when you sell the property. maybe you should pay a bit more into the principal on the property and refi a lower amount.
Oh and to add to that, the losses will offset positive income years or you will recognize all of those losses in the year in which you sell the property.
I would sell it off. This property sounds like a lemon. Instead of paying the note off, use the 100K as a downpayment on a larger rental propery that cashflows properly. I bet you would get a lot better ROI.
Brian does bring up an option; however, this also heavily depends upon what you can sell it for versus what you owe on the property, if you can't sell it for what you owe or more then just pay the note down to increase your cash flow. It would cost you more to find and purchase another property. You also have the option of finding a property that cash flows VERY nicely and using the paper losses to offset that income as well.
The word townhouse has different connotations in different parts of the country. I will assume you are talking a condominium with an association that is run by a board of directors.
Understanding the financial condition of the association will allow you to predict smooth sailing in the future or a bumpy ride. Analyze this like you would a company and try to predict if the future holds promise. If you see potential problems, get out and don't look back. Condo horror stories are not uncommon.