How much to rehab before renting the house out

5 Replies

I was thinking of moving into a livable house that needed updating and minor repairs, living there for 2 yrs then renting it out. Since renters don't take as much care of the rented property, how much rehabbing should I do?

Night owl

If you plan on living there that long then you should consider selling this property outright after that time period. The reason? You can get capital gains tax treatment if you sell it after living in the house for 2 out of 5 years (READ: KEEP AN EXTRA $1000+ FOR EVERY $10,000 IN PROFIT).

Make it nice (visit your neighbors that have nice looking houses), not over the top, and take care of the house while you're living in it.

Then I assume an exchange 1031 would be the way to go if we lived there a short time to fix it up before renting and then buy another home to actually live in. Is that correct?
Nightowl

I just realized a mistake in my previous post. You get to exempt the first $250K for a personal residence ($500K if married) and you pay no tax *at all*. The basic gist is the same, but you don't pay *any* tax on the first $250K if you live in the property for 2 out of 5 years... not even capital gains. That's what I get for typing faster than I'm thinking.

A 1031 exchange defers taxes to a later date (which is good), but the 2 of 5 personal residence exemption eliminates the liability forever (which is better). Always eliminate taxes entirely if possible, but defering taxes to a later time is also "A Good Thing" (tm).

I would suggest reading this thread as well regarding holding guidelines for 1031 exchange property: http://forums.biggerpockets.com/viewtopic.php?t=5625&highlight=1031+exchange.