Tax Question: Renting out and renting

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Clever_Username
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Tax Question: Renting out and renting

Post by Clever_Username » Mon Apr 11, 2016 11:55 am

Hi all,

I currently live in a condo I own; I have owned it for about ten years and have lived there for nine of the past ten (first five, last four), renting it out in between when I worked out-of-state for a year.

I'm currently thinking of selling it at some point in the not-too-distant future (a year or two) and getting a larger place elsewhere in the city. Rather than do this all at once, though, I've been thinking: I don't know if the city I've been looking into for moving is for me. I enjoy it when I'm there, but there's a difference in visiting friends for a day and buying a house. It's about equidistant to my job from my current place, although the commute itself would be different.

So my current thought: because my condo is near a university, it should be easy to rent out to a student (many people in my building own condos for this exact reason) and, for approximately the same amount, rent an apartment near to where I'm thinking of buying my next house and live there for a year to see if I actually like the area on a longer-term basis (and also other things, such as if the commute is sufficiently worse that I'd hate living there, or if there's something about living in the area I don't like but that I don't notice or care about when visiting friends there, etc.

I welcome any advice on this matter, but my specific question is related to taxes, and what renting out a condo and renting an apartment do to them.

Condo mortgage: approx $1850/month.
Condo HOA dues: approx $300/month
Estimated rental income: approx $1700/month.
Estimated rental cost (for the place I'd be living in): approx $1700/month

Can anyone comment on the possible tax differences here? I'm in the 28% federal, 9.x% state marginal brackets (est. $135-140k income in 2016). I don't even know enough about this to know if I've left out any important information, so please feel free to ask if it's needed.

Thank you in advance for any help you can provide.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

NoVa Lurker
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Re: Tax Question: Renting out and renting

Post by NoVa Lurker » Mon Apr 11, 2016 12:15 pm

Short answer - probably, nothing will happen to your taxes except they will get more complicated!

The longer answer would require a lot more information.

But basically, it looks like your annual expenses related to the condo (which can include the interest on the mortgage, HOA, property taxes, depreciation, maintenance expenses, etc.) will exceed the rental income you will receive. If that is the case, you will not have any extra income to pay taxes on. Keep in mind that, when you sell, your depreciation will likely affect your basis for calculating profit made on the sale; whether this matters will depend on whether you sell for way more than you bought it for.

I am not a tax expert, but I became an "accidental landlord" a couple of properties over the years. I was always very happy when we sold them.

(Personally, I would sell if I were you, and also wait to buy in your new location. But that decision wouldn't be driven by taxes, it would be driven by the potential headaches if you get a bad renter, and in the greater difficulty in trying to sell the condo after you move, while you have a renter.)

mcraepat9
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Re: Tax Question: Renting out and renting

Post by mcraepat9 » Mon Apr 11, 2016 2:42 pm

NoVa Lurker wrote:I am not a tax expert, but I became an "accidental landlord" a couple of properties over the years. I was always very happy when we sold them.

(Personally, I would sell if I were you, and also wait to buy in your new location. But that decision wouldn't be driven by taxes, it would be driven by the potential headaches if you get a bad renter, and in the greater difficulty in trying to sell the condo after you move, while you have a renter.)


+1

Do not become a landlord unless you are prepared to do so and this is how you want to spend your time. You can find many threads on this kind of "accidental" or "amateur" landlording on Bogleheads. Please talk to owners who have done this before prior to jumping in. It is not as simple or clear cut as you think.
Amateur investors are not cool-headed logicians.

curmudgeon
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Re: Tax Question: Renting out and renting

Post by curmudgeon » Mon Apr 11, 2016 3:09 pm

There are some gotcha's if you have significant gains or losses in the value of the place when you finally go to sell. Right now, gains up to $250K (single) would be tax free. If you keep it as a rental several years, those gains would become partially to fully taxable as long-term capital gains (and ordinary CA income).

Surprisingly, if you have had a significant loss in value, that could ALSO be bad news on the tax front over time. There have been a couple of threads here from people in this scenario: bought for say $200K, converted to a rental at a low point in market valued at $120K - taking depreciation on that basis, market recovers back to $180K and they sell a few years later. Suddenly they have $60K of capital gains to pay tax on even though their overal ownership was at a loss.

I would probably sell, rent in the new city for a year, then think about buying there.

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Re: Tax Question: Renting out and renting

Post by Clever_Username » Mon Apr 11, 2016 4:37 pm

Thanks for the advice everyone. I can certainly see this becoming a headache as an accidental landlord -- it certainly isn't a job I want long-term. I plan to have someone who manages a handful of units in my building coordinate the renting.

The condo is currently at a loss; I bought at $400k and a similar unit sold recently for just under that. Fortunately, I'm not underwater on the mortgage at all. I'm going to look into selling then.

Do I have to take deprecation on the 2016 taxes if I do rent it out? Seems like something worth avoiding actually, for the headaches.

Is there any advantage to not selling now? I will need to eventually sell to make the down payment on the house I intend to buy.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

Gufomel
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Re: Tax Question: Renting out and renting

Post by Gufomel » Mon Apr 11, 2016 4:52 pm

Is there any chance you would move back into your current house? It sounds to me like you're definitely moving out of that house, but you're just trying to decide where to go next. Maybe I'm misunderstanding, but if that is the case then you should definitely sell your current house. Doesn't sound like you're wanting to be a landlord, so it's not worth the hassle.

If I'm misunderstanding, and there is a possibility that he would move back into your current house, then it definitely gets more complicated. If you think there's a reasonable chance you might want to move back after trying out a year in the city, then I would hesitate to sell the house and be hit with all the closing costs only to buy another house in the near future next door.

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Clever_Username
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Re: Tax Question: Renting out and renting

Post by Clever_Username » Mon Apr 11, 2016 4:55 pm

I'm not planning to move back in, no. I view it as extremely unlikely. I just don't know where I'm buying yet, and -- and this is probably sub-optimal mathematically -- in my mind, that the most recent comp is less than I paid for this, I'm not quite ready to sell. I realize that might be a silly way to think about it, especially since I bought it in 2006.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

Gufomel
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Re: Tax Question: Renting out and renting

Post by Gufomel » Mon Apr 11, 2016 5:09 pm

In that case, I say sell. It sounds like your only reason (or at least highest priority reason) for not wanting to sell is the value is less than what you bought it for. Do you have strong reason to believe (and support for believing) that prices are rising in your city - and more specifically your neighborhood - in the next 1-2 years? If not, it's just a gamble, and making you an "accidental landlord" to boot. Maybe if your expected rental income was significantly higher than your mortgage then possibly it makes sense, but it looks like when you factor in property taxes (if any), HOA, management fees, maintenance, repairs, you may be at a significant loss.

Since you asked about taxes, if you have rental losses accumulated over the years you rent it, you'll get to deduct those on your taxes in the year you sell the property (assuming you aren't getting to deduct the rental losses each year on your tax return due to income threshold). But you'll also have to recapture any depreciation expense you claimed as income in the year you sell. Based on the income/expenses you've provided it sounds like you would have a loss even before considering depreciation expense (I'm not sure what portion of the mortgage is interest - only the interest is a deductible rental expense).

You asked about whether you have to take depreciation expense if you do rent it out. I believe if the rental period is less than one year, then you cannot claim depreciation expense. If it's more than one year, you're required to claim depreciation.

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