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Turning your primary residence into a rental question
Posted on 7/1/16 at 11:17 am
Posted on 7/1/16 at 11:17 am
I'm looking into doing this on purpose in the next year because I want to buy a new primary to better fit our situation with multiple kids now. I'll owe about 25% of the appraised value. I have 3 other rental properties currently and I'll probably have a 4th at that time so this would be my 5th.
The numbers are not going to be great, but I can get a 6-7% COC return and I know I can get great tenants most likely a military Captain or something along those lines. I just feel like with interest rates so low right now why should I sell a property I intimately know that probably will be very easy to manage?
My questions mainly correspond to if I have it almost paid off is it better to sell as a primary where there won't be a single capital gain and instead buy cheaper properties that will be paid off? One other reason I'd like to hold is because the appreciation of my current residence should be better than anything else I'd buy.
Thoughts?
The numbers are not going to be great, but I can get a 6-7% COC return and I know I can get great tenants most likely a military Captain or something along those lines. I just feel like with interest rates so low right now why should I sell a property I intimately know that probably will be very easy to manage?
My questions mainly correspond to if I have it almost paid off is it better to sell as a primary where there won't be a single capital gain and instead buy cheaper properties that will be paid off? One other reason I'd like to hold is because the appreciation of my current residence should be better than anything else I'd buy.
Thoughts?
3
Posted on 7/1/16 at 11:21 am to baldona
How much gain would there be if you sold now?
Posted on 7/1/16 at 11:25 am to baldona
If I understand your question, you want to know if you should sell this property and invest in smaller rental units with the proceeds, or hold this property as a rental and sell it down the road?
I guess it depends on the amount of gain you would have that would be taxed.
Also, you can rent this property out for the next three years and then sell it under the principal residence exclusion. To qualify as a principal residence, it has to be your principal residence for 2 of the previous 5 years. So you might want to rent it for three years and then sell it- as you would have three years of rental income, more home paid off, and still not be taxed on the gain.
I guess it depends on the amount of gain you would have that would be taxed.
Also, you can rent this property out for the next three years and then sell it under the principal residence exclusion. To qualify as a principal residence, it has to be your principal residence for 2 of the previous 5 years. So you might want to rent it for three years and then sell it- as you would have three years of rental income, more home paid off, and still not be taxed on the gain.
Posted on 7/1/16 at 11:25 am to baldona
Just FYI if you decide to keep the rental and the purchase of your new primary is going to be your 5th current mortgage (or more) I think there is a requirement on putting at least like 25% down.
Posted on 7/1/16 at 11:30 am to TheOcean
I bought it as a short sale 3 years ago and I've been lucky so its increased in value about 25%, give or take 5% minus closing costs additionally.
I'm idiot though I was thinking my capital gains tax was on the entire purchase and not just my gain. Do capital gains start from the time I bought it? I'd assume yes, and not just the time it stopped being my primary right? So realistically if I rent it for 5 years at about 3% depreciation a year that will negate my 15% long term capital gains tax right? I mean roughly of course?
I'm idiot though I was thinking my capital gains tax was on the entire purchase and not just my gain. Do capital gains start from the time I bought it? I'd assume yes, and not just the time it stopped being my primary right? So realistically if I rent it for 5 years at about 3% depreciation a year that will negate my 15% long term capital gains tax right? I mean roughly of course?
Posted on 7/1/16 at 11:32 am to Tigerfan56
quote:
Also, you can rent this property out for the next three years and then sell it under the principal residence exclusion. To qualify as a principal residence, it has to be your principal residence for 2 of the previous 5 years. So you might want to rent it for three years and then sell it- as you would have three years of rental income, more home paid off, and still not be taxed on the gain.
That's right, I forgot about that too. Definitely something to keep in mind.
Posted on 7/1/16 at 11:38 am to baldona
Cap gains tax would just be on your amount realized (what you sell it for) minus basis (whatever you paid for it). Difference would be what you pay in cap gains tax. If it has increased in value by 25% and you're an OT baller you might want to take advantage of the Home Sale Tax Exclusion of $250,000--possibly $500,000 if you and your wife qualify under the rules. Then pop the $ you saved in not paying cap gains taxes into other rentals.
Another option is to rent out your current residence, buy another one, live there for two years, sell and use up your exclusion on the new home and then go live in the old residence for two years to get the exclusion for your current house.
eta: since you live in FL and depending on your net worth + possibly exposure to liabilities (rentals/what you do for a profession), you may want to read up on the FL homestead laws if you choose to buy another house. I'd also pop the rentals you have paid off into an LLC
Another option is to rent out your current residence, buy another one, live there for two years, sell and use up your exclusion on the new home and then go live in the old residence for two years to get the exclusion for your current house.
eta: since you live in FL and depending on your net worth + possibly exposure to liabilities (rentals/what you do for a profession), you may want to read up on the FL homestead laws if you choose to buy another house. I'd also pop the rentals you have paid off into an LLC
This post was edited on 7/1/16 at 11:45 am
Posted on 7/1/16 at 11:40 am to baldona
Houses in my neighborhood are advertising rents between 2-3 times what my current mortgage is. I can have 5-10% of my new house down payment in savings and then get the rest from a refinance of my current primary and pull out cash. I'd still have over 60% of appraised value on my current primary if I pulled out cash for a down payment on a new primary.
I'm not one to have all kinds of debt, but at the same time mortgage interest is so low right now it almost seems crazy not to leverage myself a little.
Two of my properties are paid off so I'm not going to hit the 5-6 mortgage max. I don't think I'd ever be comfortable with that many mortgages anyway.
I'm not one to have all kinds of debt, but at the same time mortgage interest is so low right now it almost seems crazy not to leverage myself a little.
Two of my properties are paid off so I'm not going to hit the 5-6 mortgage max. I don't think I'd ever be comfortable with that many mortgages anyway.
Posted on 7/1/16 at 12:11 pm to baldona
Yeah that was a brain fart on my part about capital gains.
How does that 2 in 5 year rule work? Do I need to get a tenant for 2 years and then sell it before 5 years? Or can I get a tenant for 3 years and then sell it at say 5 years 3 months?
How does that 2 in 5 year rule work? Do I need to get a tenant for 2 years and then sell it before 5 years? Or can I get a tenant for 3 years and then sell it at say 5 years 3 months?
Posted on 7/1/16 at 1:05 pm to baldona
Posted on 7/1/16 at 4:06 pm to TheOcean
Ha. Come on man if I wanted the legal terminology id email my CPA.
Looks like I could rent it for 2 years and then put it on the market and hope it closes in under a year basically. But if I keep renting it my long term capital gains would only be 15% right? Or 18.4% or whatever now with the Obamacare tax added on? So really if I can rent it for 7% coc minus 3% of depreciation/ year my tax basis is only roughly 7-8%ish of the appreciated value?
Looks like I could rent it for 2 years and then put it on the market and hope it closes in under a year basically. But if I keep renting it my long term capital gains would only be 15% right? Or 18.4% or whatever now with the Obamacare tax added on? So really if I can rent it for 7% coc minus 3% of depreciation/ year my tax basis is only roughly 7-8%ish of the appreciated value?
This post was edited on 7/1/16 at 4:08 pm
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