Basic Knowledge About Rental Income, Taxes, and FIRE Needed

[Allie]

Is there anyone out there who is patient and kind who will be able to help walk me through the impact of rental income on overall income and FIRE? 

The general plan is to FIRE in 2020 and move from one very cold high cost of living area to a very hot high cost of living area.  My husband (because he loves his job) will likely continue to make a some money working after 2020.  Currently, our spending is high and this is in part due to the high cost of housing in our area.  Obviously, lowering our expenses is a goal to increase savings now, but post FIRE needing less income would allow us to take advantage of healthcare subsidies and a favorable long term capital gains rate as we liquidated assets, right?

Presently, we have a big, fat mortgage.  Given the low rate, it seems to make sense to keep it for now and invest our money in stock funds.  But, when we FIRE, would it make sense to pay it off and decrease our annual spending?  We could sell the house, and may in the future, but want to be absolutely sure tropical island life is for us before we go through the hassle and expense of a full move. 

If we were to pay off our mortgage in our present location and decide to move or travel for an extended period of time and rent out our house, would that rental income potentially impact our gross income for tax purposes? 

I know we have a few years left to figure things out, but it seems like something we should be planning for now.

I'm hungry for knowledge about rental incomes from VRBO style temporary rentals, long term rentals, income, and taxes.  But, need it broken down into nice little bits.  "FIREing with an expensivish home for dummies" is about my speed.

[MDM]

Presently, we have a big, fat mortgage.  Given the low rate, it seems to make sense to keep it for now and invest our money in stock funds.  But, when we FIRE, would it make sense to pay it off and decrease our annual spending?

Financially, probably not.  Emotionally, that's your call.
The financial reasoning is that compound interest doesn't care whether you are retired or not.  If you can earn a higher return by investing than it costs for the mortgage, you are better to keep the mortgage.
Think of it as - or even do - having a separate account that starts with a value equal to the remaining mortgage principal.  You could withdraw all that account and pay the mortgage.  Or you could pay the monthly amount from that account while the account continues to grow.  There is of course a risk the account will drop.
Your annual spending outside that account is unaffected.
That's the short version.  Much discussion on this subject elsewhere.

If we were to pay off our mortgage in our present location and decide to move or travel for an extended period of time and rent out our house, would that rental income potentially impact our gross income for tax purposes?

Yes.  For a rough estimate of "by how much", see the MMM case study spreadsheet.  For a more refined estimate, try TaxAct, TurboTax, etc.

[Another Reader]

There's a reading list pinned at the top of this category.  Also a really good post on how to evaluate rental property.  After you have done some reading, you might check out your local real estate investors' association.  Ask all your friends and family if they are investing in real estate and talk to the ones that are.  Read some good blogs - nononsenselandlord.com comes to mind.

Your other questions are too general and lack the information necessary to give reasonable answers.  More income, expense, asset and liability numbers are needed.  You may want to post a case study.

[Allie]

Thanks for the links.  I went back to add in numbers...

2 adults (35 now), 2 kids (2/4),

Current mortgage:  2,400
Potential rent:  2,900
Rent for house in warm place: 2,500-3,000
Projected FIRE spending not including housing:  3,200

Total stash needed before husband will pull the plug:  1.5m + 310,000 (mortgage).  Projected for 2020 with most of the money tied up in retirement accounts that will need to be transitioned to a Roth.  Unless I added wrong, this should cover our expenses.  If not, I will send the husband back to work (joking, he loves his job).

...after I added in the numbers I realized I didn't even know where to begin asking about how all of the possible scenarios regarding our housing (renting it out and traveling around and renting elsewhere) would impact our health insurance subsidy, tax stuff, etc.  Any thoughts are appreciated, but I understand I may need to head out to google and educate myself a bit.

Thank you both for your time and input!

[neo von retorch]

If your mortgage, including all PITI, is $2400, once you add in things like maintenance, property management (or your time and travel) and anything else that comes up, you aren't really cash flow positive with a rental at the $2900 level. If that is the case, when you get to that point, you are likely better off selling the house and investing the proceeds. (You could put some or all of it in an REIT fund to maintain asset allocation in real estate.)

I know you said you're at the "for dummies" level, so if what I said was confusing, we can break it down for you further. The gist is - don't just rent a house instead of selling it because "I already own it." As MMM recently said, if you wouldn't buy it, you should probably sell it. That's just as true (or perhaps more so) for rentals that are not profitable. Of course, you could do a whole "rental property" case study in the Real Estate / Landlords specific forum to answer that question more concretely. And the equations could change a lot between now and when you are ready to retire and move!