Due to a great mortgage rate? We're leaving Iowa in June and are considering not selling but renting out our house instead.
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Gotta wonder who will look after the place. Hint. Not the renters.Due to a great mortgage rate? We're leaving Iowa in June and are considering not selling but renting out our house instead.
Dude gots the smarts ovah heah.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.
Nice writeup, Sea. Wifey and I were talking about the capital gains issue recently and you made it easily understandable.Dude gots the smarts ovah heah.
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.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.
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.
Renters are never as good as homeowners at what?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.
Great information.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.
Typically, renters are worse at maintaining and caring about others in the neighborhood. Also, rental owners seem less likely to do external updates.Renters are never as good as homeowners at what?
Ah, so absent property owners are the problem. I don't plan on that being my behavior, but it's easy to say now.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.
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?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.
Yes, as @CaboKP said. Not maintaining yards, etc. Also, I think some landlords drag their feet on major stuff like repainting.Renters are never as good as homeowners at what?
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?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?
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.Yes, as @CaboKP said. Not maintaining yards, etc. Also, I think some landlords drag their feet on major stuff like repainting.
That would make you a great landlord!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?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?
Oops, free consultations are limited. You gotta pony up…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 is expensive but workable. We've been talking to a management companyInsurance 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.
I know. Just making sure you‘re aware of potential hurdles.Insurance is expensive but workable. We've been talking to a management company
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?
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?
One thing I'm considering is including lawn care in the rent.
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.
No, I mean the oppositeNot 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.
Yes: just how annoying it will be is the questionIt's not for those who are easily annoyed but it is a way to build wealth. You need to realize it takes work...