Due to a great mortgage rate? We're leaving Iowa in June and are considering not selling but renting out our house instead.
Anyone moving and choosing to rent their current house instead of selling
- Thread starter CLUB215
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Couple people in our neighborhood are doing that. Kinda annoying because renters are never as good as homeowners. But it’s their house, their choice.
Gotta wonder who will look after the place. Hint. Not the renters.
You gotta have somebody watching your stuff.
Anything nice out there for like $10 a month?.......
I could afford that.
I could afford that.
Sounds like a PITA I would not want to deal with from out of state if I’ve never done it before.
Funny, the wife and I still ~15 years away from retirement were discussing merits of selling the house and becoming renters when we retire with the thought being we could travel and embeds in different areas across the country and world for 6-12 months at a time.
We know a family doing this and moving to Italy. Kinda surprising they want to babysit the management company and deal with exchanges and all that from overseas.
I thought everyone on HORT owned at least 3 houses
A quick caution/tip if you are going to do this, particularly if the value of the house has appreciated significantly since you bought it - you could be setting yourself up for an unnecessary tax hit when you eventually sell it. If you sell your primary residence - defined as having been your residence for at least two years out of the five years prior to the sale - the first $250k of gain is not taxable ($500k for a married couple). If you rent it for too long, then sell it, you'll end up paying tax on the entire gain. So say you bought it for $200k, lived in it for 10 years, and now it's worth $400k. You buy a new place & move. If you sell within the window of time to exclude the gain, no tax. If you wait 3 years & a day, then sell, $200k taxable gain.
There's a way around it that, if the appreciation is sufficient, is well worth the cost & paperwork shuffle. Form an S Corp, sell the old house to it at current market value. You exclude the gain (up to the $250k/$500k limit). Now the S Corp owns the rental house, you own the S Corp. The S Corp rents the house, and as an added bonus gets to depreciate it at the purchase price when you sold it to the corporation. If you still owe on a mortgage, it can be a bit more complicated (because the bank might want/expect to be paid off when you sell it to the corporation), but there are ways around that. If you go this route, do the paperwork by the book & spend a little money to get an appraisal to document the market value of the house.
There's a way around it that, if the appreciation is sufficient, is well worth the cost & paperwork shuffle. Form an S Corp, sell the old house to it at current market value. You exclude the gain (up to the $250k/$500k limit). Now the S Corp owns the rental house, you own the S Corp. The S Corp rents the house, and as an added bonus gets to depreciate it at the purchase price when you sold it to the corporation. If you still owe on a mortgage, it can be a bit more complicated (because the bank might want/expect to be paid off when you sell it to the corporation), but there are ways around that. If you go this route, do the paperwork by the book & spend a little money to get an appraisal to document the market value of the house.
Nice writeup, Sea. Wifey and I were talking about the capital gains issue recently and you made it easily understandable.
Good to know. I think we've seen over $100k appreciation. How could we sell the house to an S Corp while keeping the same mortgage? The low rate is the only way this is financially feasible.
You'd have to review your existing mortgage; if it allows assumptions, you just sell it to your S Corp & have the S Corp assume the mortgage. If it does not, the common way around it that I've seen is to use a wraparound mortgage or "contract for deed" (between you and your S Corp). The title doesn't transfer until the S Corp pays off the mortgage, and no sale or mortgage documents are filed with the state - the paperwork is all strictly between you and your corporation. Done right, it avoids the "due on sale" clause with your bank but counts as a sale for tax purposes.
When you make the sale, on your tax return elect out of the "installment sale method" of reporting the gain on the sale.
If your mortgage does have the clause prohibiting assumptions or contains a due on sale clause, it would be a good idea to spend a little $ with a good real estate attorney to make sure you do all the paperwork correctly.
Typically, renters are worse at maintaining and caring about others in the neighborhood. Also, rental owners seem less likely to do external updates.
I assume that is what was meant. That has been my experience.
Ah, so absent property owners are the problem. I don't plan on that being my behavior, but it's easy to say now.
I haven’t sold a house at enough of a gain for this to matter, but are there capital gains in play if you take all the profit from the sale and put it into the down payment on the next primary residence?
Yes, as @CaboKP said. Not maintaining yards, etc. Also, I think some landlords drag their feet on major stuff like repainting.
I think that was the old rule. I’m pretty sure now it’s just $250k or $500k exemption from capital gains regardless of what you do with the cash. @SeaPA?
One thing I'm considering is including lawn care in the rent. I agree about blighted properties with absent owners. It's not something I see myself doing. Hopefully the rental income pays for new siding in a few years.
Also curious (@SeaPA), if you have a house for years and go through a pretty major renovation, how does the reno factor in? Simple math argument - buy $1M home and live in it 5 years. Decide it needs a substantial overhaul and do a $400k renovation….live in it several more years and then move (for whatever reason) and sell for $1.8M. Is that considered a $800k capital gain? I’d assume you can at least add the renovation to the cost of the home? And be at more like $400k in gain?
Insurance can be an issue. You’ll need a property management company if you aren’t within a certain distance. Some companies will allow a relative.
Oops, free consultations are limited. You gotta pony up…
Naw, just teasing. Great question.
Insurance is expensive but workable. We've been talking to a management company
We are already making improvements to the house in preparation of selling, including new kitchen appliances. If we end up renting it out I think I'll also get new washer/dryer, water heater, and maybe furnace. All are at or beyond end of life but something that doesn't matter as much when selling.
Being a landlord isn't terrible if you have the right mindset for it. If you're doing it because you think it's going to pay your mortgage and profit on it in the short term while the mortgage is being paid, good luck. If you own the property outright, have a good property manager and a handy man you trust to fix things, you will be fine in the short and longterm.
Correct - when calculating your taxable gain, you get to include the cost of additions, renovations, remodeling...so in your example, you'd have a gain of $400k. If you're married, you can exclude up to $500k of gain (assuming you meet the rules for it being your principle residence), so there would be no tax due. If you're single, you'd get to exclude $250k & pay tax on the other $150k.
That was the OLD tax law; there was no flat dollar amount exclusion, if you wanted to avoid tax you had to roll the sales proceeds into the purchase of a new house. The way the law worked, to fully avoid tax you had to buy a more expensive home. That worked fine for those who were moving up/buying a bigger, fancier home - but if you wanted to downsize, you were stuck with a tax hit.
The law was changed a long time ago (I think 1997) - I'm surprised so many people still remember the old rule & think it's still in place.
I'd advise you to minimize expenses (duh!), but this is probably money worth spending. We've got a rental home in Atlanta and cover lawn maintenance. Your neighbors will appreciate that you are holding your place to at least a decent minimum standard. Nobody wants their neighbors to turn a home into a rental, but a lot of those fears can be somewhat assuaged, with something as simple as decent lawn maintenance.
If your renters happen to enjoy lawn care and gardening, great. The appearance of your place will be even better. Run background checks (financial and criminal) on your prospective renters and stay in regular contact with your neighbors, to make sure they don't have any material complaints.
Not sure how you mean that - are you going to have the tenant do the lawn as part of his rent? That's a mistake - it's a near certainty that they will do a shitty job. Charge a higher rent and pay a lawn service to keep the yard up.
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