All Forum Posts by: Maximilian Glodde

@Colleen F. I already formed an LLC because we plan do have more properties under our belt soon :). I've been holding off on the transfer for this property because I don't want to lose the exemption in case I want to sell in the next 2.5 years. Alternatively, I would just 1031 X down the road, in which case this really wouldn't be a problem. Just like to keep my options open for now.

@Immanuel Sibero I think you misunderstood my point. If you sell for $20K after 10 years, a zero gain on paper, since the OP didn't take a deduction for deprecation, he would be liable for depreciation recapture since the cost basis is now lower. We're saying the same thing. Have a good night. Thanks for the great discussion.

Hi @Tim Kaminski,

There's no easy answer to this one, it's really whatever you're comfortable with. That being said, I would look at your return on equity for a stabilized property. Specifically, taking Annual Rent / Total Equity. If you're happy with that number, i.e. you don't think you can get a better ROE in another area then all good. If the number is super super low, then you may consider reinvesting that money elsewhere for a better return.

On the other hand, if the property is making money and causes you no headaches, why not hold on to it until you have a better opportunity come up.

Keep in mind that you'll have selling costs to consider as well.

Do you have some more specifics on your property?

@Immanuel Sibero

Depreciation recapture is technically added as a form of taxable income in the year of the sale. If you just keep 1031 exchanging then that shouldn't be an issue until way down the road.

Yes, the government takes some of it back when you sell, however, when we think about the velocity of money, allowing us to take depreciation as an expense, leaves more money in our pockets in the short term, allowing us to reinvest that money in the economy (e.g. more real estate, other investments). It allows us to effectively grow your asset base on a tax deferred basis, similar to the way a 401k allows you to grow your asset base on a pre-tax basis, if that makes sense.

If you don't have a gain on the property, you could still be liable for depreciation take back taxes because since the property has been depreciating over time.

Anyway, I think we've all belabored this topic extensively and hope that we were able to help the original poster with their question :)

Home Renovision DIY - That guy should be on TV!!!!

https://www.youtube.com/channel/UCnorhjQR4zJkT7AVNhu395Q

Hi All,

I currently own a rental property that I lived in for almost 3 years. I moved out last year in August and have approximately 2.5 years left to sell it and realize a tax free capital gain. Question is, does anyone know whether I would still be able to take this tax exemption if I transfer the property into an LLC? My initial thought is "no". If no is the answer, I should probably just get decent liability coverage.

Thanks

@Immanuel Sibero you are absolutely correct. Although I didn't want to make my example too complicated. The recapture tax is 25% I believe, so not quite as high as ordinary income tax rate. So you would pay a slightly higher tax on the depreciated amount. Nonetheless, the argument that you would be better off by taking the depreciation deduction still stands.

Thanks for keeping me honest. :)

@Account Closed this is how i would break down your question:

Disclaimer: I am not a CPA, this is just my understanding. You should definitely reach out to a qualified individual.

1. Depreciation for tax purposes = (purchase price - land value) / 27.5. If land value is not available from your tax assessors office, you could make an assumption that land is 10-25% of the value. The number you get from that calculation is what you can deduct from your annual rental income. You depreciate the property from the date you put it in service. So if you lived in it for 2 years first and then start renting it, you would start the depreciation calculation from the day you start renting it and use your purchase price / 27.5. Age of home is irrelevant.

2. Tax Value is just what the city/county has your property valued at and is the basis for determining how much property tax you owe on an annual basis. It is not uncommon to see the tax assessors value be vastly different from your purchase price.

Total side note, I went to WSSU in Winston for 3.5 years! Go Rams. :)

@Robert Lei naturally you have to follow the lease terms if you cannot reach an agreement. I am aware though that you could offer "cash for keys", a strategy often discussed on the podcast. I don't know what you are charging them in rent, but basically offer them a sum of money contingent on agreement to terminate the lease early. Make sure they sign the appropriate release forms etc. 

You probably know this, but just in case: you can absolutely not discriminate (or make it seem like you are) against the upstairs tenant for having kids as this is considered on of the protected classes. You will lose your a** if they ever had reason to believe that's why they were kicked out.

In all honesty, it's only 4 more months until September. Yes, it sucks for the downstairs tenant, but this isn't a new problem for them. I would just stay out of it and let the downstairs tenant know that there's a high chance that you will be non-renewing the upstairs lease (don't give a definite though) and subsequently work on improving the soundproofing. That should keep them happy as they have something to look forward to. For you, it's guaranteed cash (well hopefully) and you can focus on dealing with the other things you mentioned in your original post.

@Charlie Moore you should google book value vs market value of an asset. All assets have a useful life and are therefore depreciated over time (on the books). The fact that you can sell it for the 150k you mentioned means that the market value is that high even though on your books it appears to be valued at zero. All that’s means is that your profit in that scenario is the full 150k because over time it has lost value on your books only. 

To be honest with you, everything the forum is telling you is trying to keep more money in your pockets. I (and most people on this thread) strongly suggest at least having a chat with a CPA for just an hour.