More Sense to Leave House Vacant Than Rent?

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sbelcroft
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More Sense to Leave House Vacant Than Rent?

Post by sbelcroft »

I heard about a scenario that seems fishy, so I was hoping y'all might have some more insight.

Let's say someone had a house they bought for $2 M several years ago (now worth $3.5 M) and bought a second home recently for $4 M that they're moving into. Both in CA.

Under what circumstances would it make sense to leave the $2 M house unoccupied instead of rented out (or sold off)? Just to clarify, the reason has nothing to do with the annoyances of being a landlord, such as tenant property damage. It supposedly has to do with being able to writeoff a substantial portion of the property tax of one of the residences as part of a business expense.

The only (fraudulent) scheme I can imagine is claiming the $2 M house as the principal residence and writing off the whole $4 M house's property tax bill. Which you can't appear to do if you rent out the $2 M house.
123
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Re: More Sense to Leave House Vacant Than Rent?

Post by 123 »

If a portion of a property is used for business purposes on an on-going basis the fact that there is an unoccupied residence on the property would not impact the ability to apportion property expenses for deduction purposes for the business use. You wouldn't be able to deduct the expenses of the residence portion of the property whether it was occupied or not.

The cost of fire insurance for a vacant home can be 10 to 100 times the cost of an occupied home. Sometimes fire insurance for a vacant home will be very difficult to get at any price.
Last edited by 123 on Sun Feb 11, 2024 10:49 am, edited 1 time in total.
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BogleTaxPro
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Re: More Sense to Leave House Vacant Than Rent?

Post by BogleTaxPro »

You can't write off property tax as a business expense unless you're actually using the property as part of a business (ie: rental, mostly. home office, sometimes). Even if you're using part of the property as a home office, your write-off is still limited to the square footage that is actually used for the business.
Carefreeap
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Re: More Sense to Leave House Vacant Than Rent?

Post by Carefreeap »

We don't know enough about the facts of the situation.

We live in the SF Bay Area but have a vacant second home in AZ. We can only write off part of our AZ property taxes because of the SALT limitations.

We also have a cabin in the So. Cal mountains which we have had in vacation rental serives for over 20 years. We have average occupancy of about 25% per month. We can write off the property taxes (along with other on-going expenses) and write off our paper losses. Even though the property doesn't really generate a positive cash flow we keep it because we love it and it has appreciated over the years which I believe keeps it from simply being "hobby" status.

There could be other situations where your friends convert their personal residence to a business property.

We have divested ourselves from our other CA rentals. With the latest set of laws (just cause evictions and relocation payments) I would not want to be a mom and pop landlord anymore. While there are bad landlords there are some nightmare tenants who can disrupt your life for months. I was lucky that my bad tenants never trashed any of my properties but I had to start a couple of evictions and it's not a fun process when you have evict families because of irresponsible parents.
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JBTX
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Re: More Sense to Leave House Vacant Than Rent?

Post by JBTX »

sbelcroft wrote: Sun Feb 11, 2024 10:23 am I heard about a scenario that seems fishy, so I was hoping y'all might have some more insight.

Let's say someone had a house they bought for $2 M several years ago (now worth $3.5 M) and bought a second home recently for $4 M that they're moving into. Both in CA.

Under what circumstances would it make sense to leave the $2 M house unoccupied instead of rented out (or sold off)? Just to clarify, the reason has nothing to do with the annoyances of being a landlord, such as tenant property damage. It supposedly has to do with being able to writeoff a substantial portion of the property tax of one of the residences as part of a business expense.

The only (fraudulent) scheme I can imagine is claiming the $2 M house as the principal residence and writing off the whole $4 M house's property tax bill. Which you can't appear to do if you rent out the $2 M house.
If you were renting it out the property tax would be a rental business expense so I don’t get it.
Topic Author
sbelcroft
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Re: More Sense to Leave House Vacant Than Rent?

Post by sbelcroft »

Thanks for the replies so far!

As far as I understand, the plan was to keep the $2 M house vacant year-round as a better financial alternative to renting it out. Especially based on the insurance comment made earlier about vacant property, I can't imagine this making sense unless the plan is to claim the $2 M house as a principal residence.

I'm just wondering if there are any strange loopholes that I'm missing.
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cchrissyy
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Re: More Sense to Leave House Vacant Than Rent?

Post by cchrissyy »

sbelcroft wrote: Sun Feb 11, 2024 1:38 pm
I'm just wondering if there are any strange loopholes that I'm missing.
my best guess is
1) you misunderstand and/or they explained themselves poorly
or
2) they explained fine, you understand fine, but they are wrong.

especially if this is a brand new idea and they have not yet done taxes, i would bet on number 2.
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sherwink
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Re: More Sense to Leave House Vacant Than Rent?

Post by sherwink »

Ask your insurance company about the future prospects of premium increases, once a house is vacant for an extended period of time!
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sbelcroft
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Re: More Sense to Leave House Vacant Than Rent?

Post by sbelcroft »

cchrissyy wrote: Sun Feb 11, 2024 1:42 pm
sbelcroft wrote: Sun Feb 11, 2024 1:38 pm
I'm just wondering if there are any strange loopholes that I'm missing.
my best guess is
1) you misunderstand and/or they explained themselves poorly
or
2) they explained fine, you understand fine, but they are wrong.

especially if this is a brand new idea and they have not yet done taxes, i would bet on number 2.
Yeah that's a good point. It's one thing to be speculative and another thing to submit it in writing! Especially because it seems like any tax preparer would catch this immediately.
Carefreeap
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Re: More Sense to Leave House Vacant Than Rent?

Post by Carefreeap »

sbelcroft wrote: Sun Feb 11, 2024 1:47 pm
cchrissyy wrote: Sun Feb 11, 2024 1:42 pm
sbelcroft wrote: Sun Feb 11, 2024 1:38 pm
I'm just wondering if there are any strange loopholes that I'm missing.
my best guess is
1) you misunderstand and/or they explained themselves poorly
or
2) they explained fine, you understand fine, but they are wrong.

especially if this is a brand new idea and they have not yet done taxes, i would bet on number 2.
Yeah that's a good point. It's one thing to be speculative and another thing to submit it in writing! Especially because it seems like any tax preparer would catch this immediately.
A bigger point is how in the world it makes financial sense to sit on an approximately $3.5M asset that's not generating any income. And real estate always costs. Even if you don't have a mortgage there's still taxes, insurance, utilities and maintenance. And something is always breaking! :oops:
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stan1
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Re: More Sense to Leave House Vacant Than Rent?

Post by stan1 »

There are neighborhoods in California where it is common for people who live outside the US (either as US citizens or non-US citizens) to basically buy a house with cash and view it as a "bank" to store their US dollars. Perhaps the people OP is referring to have that cultural mindset?

Remember taxes are paid on income less expenses. So its almost always going to be advantageous to earn income to offset the expenses of a house. I won't say always because as soon as I write that someone will post a weird example where it was better to leave a house vacant. :-)
bradinsky
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Re: More Sense to Leave House Vacant Than Rent?

Post by bradinsky »

sherwink wrote: Sun Feb 11, 2024 1:44 pm Ask your insurance company about the future prospects of premium increases, once a house is vacant for an extended period of time!
+1 they take a very dim view of insuring unoccupied houses.
1moreyr
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Re: More Sense to Leave House Vacant Than Rent?

Post by 1moreyr »

sbelcroft wrote: Sun Feb 11, 2024 1:47 pm
cchrissyy wrote: Sun Feb 11, 2024 1:42 pm
sbelcroft wrote: Sun Feb 11, 2024 1:38 pm
I'm just wondering if there are any strange loopholes that I'm missing.
my best guess is
1) you misunderstand and/or they explained themselves poorly
or
2) they explained fine, you understand fine, but they are wrong.

especially if this is a brand new idea and they have not yet done taxes, i would bet on number 2.
Yeah that's a good point. It's one thing to be speculative and another thing to submit it in writing! Especially because it seems like any tax preparer would catch this immediately.
was this about taxes? or was this recency bias in that california real estate has always appreciated so we know it's going to?


I don't consider this a sound investment approach, i was just trying to figure out why anyone would want a vacant home. I would be afraid I come back and it's full of squatters I can't evict.....

My sister had a similar issue when she rented it and the person renting sublet it to someone to live in the basement (against my sister's rental contract). When the contracted tenant left, the sublet refused and had no contract with the landlord that they belonged or even signed with the original tenant.

it still took quite a while to get the squatter/sublettor removed from a property that she had no contract with the landlord to be in.
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Beensabu
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Re: More Sense to Leave House Vacant Than Rent?

Post by Beensabu »

sbelcroft wrote: Sun Feb 11, 2024 10:23 am Under what circumstances would it make sense to leave the $2 M house unoccupied instead of rented out (or sold off)?
The obvious would be that they want it readily available to be:

- occupied by them or their family/friends
- sold

Plenty of people with enough money have second homes or vacation homes that they don't rent out.
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funxional
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Re: More Sense to Leave House Vacant Than Rent?

Post by funxional »

Beensabu wrote: Sun Feb 11, 2024 7:39 pm
sbelcroft wrote: Sun Feb 11, 2024 10:23 am Under what circumstances would it make sense to leave the $2 M house unoccupied instead of rented out (or sold off)?
The obvious would be that they want it readily available to be:

- occupied by them or their family/friends
- sold

Plenty of people with enough money have second homes or vacation homes that they don't rent out.
Right, but not for tax savings (on property tax). I can understand not renting it out because of the headache but as another poster indicated the property tax is a business expense.

I am not sure how the math works out on primary residence exclusion and rental. I think it's pro-rata but maybe they think they will lose $500k exemption if they still in the next 2-3 years?
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Beensabu
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Re: More Sense to Leave House Vacant Than Rent?

Post by Beensabu »

funxional wrote: Sun Feb 11, 2024 8:07 pm
Beensabu wrote: Sun Feb 11, 2024 7:39 pm
sbelcroft wrote: Sun Feb 11, 2024 10:23 am Under what circumstances would it make sense to leave the $2 M house unoccupied instead of rented out (or sold off)?
The obvious would be that they want it readily available to be:

- occupied by them or their family/friends
- sold

Plenty of people with enough money have second homes or vacation homes that they don't rent out.
Right, but not for tax savings (on property tax). I can understand not renting it out because of the headache but as another poster indicated the property tax is a business expense.

I am not sure how the math works out on primary residence exclusion and rental. I think it's pro-rata but maybe they think they will lose $500k exemption if they still in the next 2-3 years?
I have a feeling they just told OP (or someone who told OP, or someone who told someone who told OP) something like that in order to avoid the whole "yeah, we have enough money to keep a $2m home we don't live in full time, no big deal". Probably never thinking it would lead to them being suspected of fraud. Poor rich people.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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