yo pd, what did you decide to do? I’m curious.
…what metro are you in?
As of march first we have it rented for 1400 a month. The feedback got me thinking and looking at it pretty hard. Renting works out better for me right now.
The house is just outside of Portland oregon. Avg. house price in the area is in the 220 range if I’m not mistaken. I think the house is above average (naturally…).
Anyway, appreciate the thoughts.
This thread was a good read.
Not sure I got a lot out of Turd’s posts, though.
Not that I dont believe you know what you’re talking about - it was just more difficult to follow.
I’m a bit suprised no one mentioned income tax considerations. Are there any? I’m not an accountant, but I would think rental income would be taxable. As well, I’d suspect that there would be offsetting costs, such as depreciation, interest expense, property taxes, etc. Does anyone know the possible ramifications?
^ the net rent is taxable income, but you can offset with interest, property taxes, association fees (if not paid by the tenant), any maintenance/improvements, depreciation, manager’s fee, etc.
Depreciation recapture and capital gains tax are the implications (I own a rental property). It’s really good for your taxes in the short term (My rental income runs a loss on paper every year, reducing my taxable income), but if you go to sell you’ll be hit by tax on gain AND depreciation recapture. So I have a savings account dedicated solely to depereciation recapture, in case I have to sell. The way to avoid the depreciation recapture is to do 1031 exchanges until you die and your inheritances get it at a new cost basis.
nothing wrong with taking the current income if it fits better into your investing goals. I would have sold it and looked for another cheap one to add value to on a 1031 exchange.
pd - what’s your ownership structure? I think you mentioned you have partners. Is it an LLC where you all share management responsibility or do you have passive money? I’m doing deals in an LLC w/ a couple partners, but my real goal is to leverage off of other people’s money with GP/LP structure with GP incentives. It’s proving difficult to make FU money on our own capital…need to leverage off of some other people’s money.
Anyone out there have a GP/LP deal going with friends & family $?
I knew you got hit with the gain, but didn’t realize you get hit with recapture as well. That blows. The gain is at least taxed as a gain (assuming you have held the property for more than a year) not ordinary income, right?
What is depreciation recapture? I would assume if you buy a rental property for $100, depreciate for several years while you own it by let’s say $40, when you go to sell your basis would now be $60. So if you sell this property for $200, your gain would be $140, is this right? Is depreciation recapture taxed at a higher rate than a capital gain?
We bought our current primary residence from an investor group that held the property in a trust. I assume there was some tax benefit to that. Any thoughts?
Two different tax rates. $100 ($200 - $100) would be taxed as a capital gain. $40 ($100 - $60) would be taxed as ordinary income. At least I think that’s how it works.
. Double post
I think depreciation recapture might be a 25% tax rate, the remainder would be capital gain.
Another option you could consider but I’m not 100% sure if it would be allowed, after X years of it being a rental property, make it your primary residence again and after 2 years you may be able to sell it and exempt the gain as its a gain on primary residence exempted up to 250k/500k depending on if you are single/married.
Depreciation recapture is 25%. And 2 years living there and not renting it out converts it to primary residence, alloowing the exemption on capital gains. But you still owe the depreciation recapture
Also, you owe depreciation recapture regardless of if you actually claimed it. Some people think if they don’t depereciate the property, they don’t have the recapture. That isn’t true – you end up having to pay those taxes without getting the benefit during holding period.
Mr. Fergeson, we (wife and I) own the property as JTWROS along with the primary residence, the office building and the vacation property. My c p a suggest such as long as we have an umbrella policy. It’s just us and the bank.
Wait, what? How can they recapture someting that was never deducted in the first place? Last year was my first year as an unwilling landlord. Haven’t done my taxes yet, but have been trying to decide on whether or not to depreciate the property because I’m going to try again to sell it this year or next, hopefully for a small gain. Are you saying that even if I don’t depreciate it, the IRS will tax part of the gain as recapture? What if I sell it for the same price I paid for it?
“There’s one tax strategy, however, that will not help. Since depreciation is recaptured when the asset is sold, it is reasonable that some people would avoid claiming depreciation as a strategy to avoid the recapture tax. This strategy does not work, because the tax law requires depreciation recapture to be calculated on depreciation that was “allowed or allowable” (Internal Revenue Code section 1250(b)(3)). From a tax planning perspective, taxpayers should claim depreciation on their property to get a current tax deduction, since they will have to pay tax on the gain due to the depreciation.”
It’s very important to be aware of all the tax implications before being a landlord. Which is why I decided to start contributing. If you didn’t claim it prior years, you’d want to go back and amend.
^ thanks rawraw. I had no intention of being a landlord. Had to move and the house is in a neighborhood that was ravaged by foreclosures, so I would have taken a huge loss if I had sold a year ago. It’s in a good rental market though and rent is more than enough to cover carrying costs. The foreclosure inventory seems to be gone, so hoping to sell next year.
Understandable. The recapture is really the thing people miss when planning. Just save for it and it won’t be a surprise (one or two years of depreciation won’t be *too* much).