Anyone moving and choosing to rent their current house instead of selling

[millah_22]

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.

If they do it at all. I had a rental where I had to take care of the lawn. It looked like shit when we got there, and I wasn't going to do any work to fix it in the year I was there. So i mowed the weeds once every 2 weeks and it still looked like shit when I left.

If a rental property wants nice landscaping they will have to pay for it themselves.

 

[hawkifann]

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.

Thanks for the updates. I imagine most people don’t really have to think about it, since those kinds of gains are not common.

 

[cheeselog8]

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.

Would an LLC accomplish this same thing or is there something special about an S Corp in this scenario? Assuming the LLC is husband & wife and not a single member LLC.

And from a fellow CPA congrats on another tax season down!

 

[SeaPA]

No, I mean the opposite

Haha, yes - do that. I speak from experience (I have a couple of rental properties - one's a condo, the other a house in a neighborhood with an HOA. I made the mistake once of renting to someone I knew (daughter of one of my clients), with an agreement to lower the rent a bit & she/her son would take care of the yard maintenance. After a handful of letters from the HOA about trimming the hedges, keeping the grass mowed, etc., when the lease was up for renewal I gave her the choice of leaving or bumping the rent to cover the cost of hiring a lawn guy.

 

[SeaPA]

Would an LLC accomplish this same thing or is there something special about an S Corp in this scenario? Assuming the LLC is husband & wife and not a single member LLC.

And from a fellow CPA congrats on another tax season down!

I think it would not work with a single member LLC (since that's typically treated as a disregarded entity so from a tax standpoint you're selling it to yourself). It might work with a husband & wife LLC, assuming you file that entity as a partnership - but I'm not really sure. The couple of times I've had clients do it, they went the S Corp path.

 

[CLUB215]

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.

I think it will likely be a negative cash flow situation for us month to month, but the gain in equity over the next few years with a sub 3% mortgage rate is hard to ignore. When I did the numbers it really became a clear winner investment wise.

 

[cfbfan23]

I think it will likely be a negative cash flow situation for us month to month, but the gain in equity over the next few years with a sub 3% mortgage rate is hard to ignore. When I did the numbers it really became a clear winner investment wise.

How much have you gained in equity over the next few years? I'm curious as to your knowledge of the future....a bit jealous, as well.


I'd caution people who are deciding to hold on to a negative cash-flowing properties.

If you need good price appreciation and rates to come way down for the transaction to make sense, good luck. Those are big unknowns. What is known is that you'll be spending more than you're taking in.......and that's with it rented.

What happens if it suddenly becomes more of a "renters-market"? What if it goes un-rented for a period of time....what does that do to the numbers? Have you factored that in? If not, I'd suggest going even more cash-flow negative and setting up a healthy reserve account for the place.

If you plan on eventually moving back to this property full or part-time, ignore what I've said. There may be other intangible factors that make you want to keep the place. That's okay. Just be very conservative/realistic in your assumptions.

 

[bhawk24bob]

I think it will likely be a negative cash flow situation for us month to month, but the gain in equity over the next few years with a sub 3% mortgage rate is hard to ignore. When I did the numbers it really became a clear winner investment wise.

.....until you get a tenant that causes more damage to the house than the the security deposit will cover, you have to take the tenant to court to evict, the tenant loses his/her job, the city starts coming out based on neighbor complaints, the tenant has a doctor's note for a half dozen ESA's, the tenant's degenerate kid and significant other moves in, etc.

Being a landlord is not something that you can build into a spreadsheet, especially on a property that you are still the mortgagee on. You need to factor in that the tenant might not only lead to a negative monthly cash flow but a catastrophic situation whereby you have a total loss and still owe the mortgagor for the balance.

 

[CLUB215]

How much have you gained in equity over the next few years? I'm curious as to your knowledge of the future....a bit jealous, as well.


I'd caution people who are deciding to hold on to a negative cash-flowing properties.

If you need good price appreciation and rates to come way down for the transaction to make sense, good luck. Those are big unknowns. What is known is that you'll be spending more than you're taking in.......and that's with it rented.

What happens if it suddenly becomes more of a "renters-market"? What if it goes un-rented for a period of time....what does that do to the numbers? Have you factored that in? If not, I'd suggest going even more cash-flow negative and setting up a healthy reserve account for the place.

If you plan on eventually moving back to this property full or part-time, ignore what I've said. There may be other intangible factors that make you want to keep the place. That's okay. Just be very conservative/realistic in your assumptions.

Good thoughts. Since buying five years ago, and using the estimate our realtor gave us for asking price, we've gained over $100k in equity. What made this feasible is me realizing this house could sit empty and we could afford the payment; not be happy about it, but it's wouldn't cause us risk of default.

 

[cfbfan23]

Good thoughts. Since buying five years ago, and using the estimate our realtor gave us for asking price, we've gained over $100k in equity. What made this feasible is me realizing this house could sit empty and we could afford the payment; not be happy about it, but it's wouldn't cause us risk of default.

My bad. I thought your reasoning for holding on was for future price appreciation heavily tied to future rate cuts.

If you can easily afford to hold on to the place, even if it isn't rented..........you don't really even need a good reason to hold on to it. Just liking the place can be enough reason.

 

[funksouljon]

@SeaPA , good notes and thoughts above. We are looking at a move this spring / summer out of state and while the selling market has cooled (but not really lost value), this was something I'd considered. Rental rates here are very enticing, esp with the property values.

 

[CLUB215]

.....until you get a tenant that causes more damage to the house than the the security deposit will cover, you have to take the tenant to court to evict, the tenant loses his/her job, the city starts coming out based on neighbor complaints, the tenant has a doctor's note for a half dozen ESA's, the tenant's degenerate kid and significant other moves in, etc.

Being a landlord is not something that you can build into a spreadsheet, especially on a property that you are still the mortgagee on. You need to factor in that the tenant might not only lead to a negative monthly cash flow but a catastrophic situation whereby you have a total loss and still owe the mortgagor for the balance.

We will rather it sit empty than get a bad tenant.

 

[CLUB215]

@SeaPA , good notes and thoughts above. We are looking at a move this spring / summer out of state and while the selling market has cooled (but not really lost value), this was something I'd considered. Rental rates here are very enticing, esp with the property values.

My suggestion is run some scenarios in Excel and see what gives you the greatest return. That's what I did.

 

[Rifler]

Did this for a short period of time during our last residential transition,.. Found the house we liked before we could sell the hose we owned,.. Worked out but it was a mild pain in the ass.