Author Topic: Case Study: My rental property/tax break  (Read 3312 times)

northwest

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Case Study: My rental property/tax break
« on: October 24, 2014, 05:25:18 PM »
I recently purchased a home that through a set of circumstances quickly evolved from my first home purchase to my first rental property.  My original intention was to use the home as primary occupancy, but as soon as I purchased the house I moved in with my lady friend. So now it is a rental, and next summer will become a vacation rental.  Previous to buying the property I was highly encouraged by my accountant that buying a home would be a great tax break. The rent that I am currently receiving doesn't cover the mortgage, it is shy by about $175/mnth, or just over $2k a year.  Hopefully as a vacation rental it will be more profitable.  Realistically I'm not that bothered by the loss as I feel like I've locked in a good loan if I were to ever live in it in the future. I guess what Im wondering is how much of a tax break is realized at the end of the year.  If its marginal, maybe I'm better off starting over and taking the $30,000 and putting it into a Vanguard fund.

Market Value: $280,000
Original Purchase price: $280,000
Original Mortgage Amount: $252,000
Interest Rate: 4.5%
Mortgage Term: 30
Term remaining: 29.25
Amount remaining on mortgage: $249,990
Gross Rents: $1350
Principal and Interest (the P&I of your PITI - should match with the above info):  $1276
Taxes and Insurance (the T&I of your PITI): $255
HOA costs: 0
Deferred maintenance notes: Undetermined.  Nothing major as of now, or the foreseeable future...

RH

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Re: Case Study: My rental property/tax break
« Reply #1 on: October 24, 2014, 08:48:00 PM »
Terrible ROI. Sell it, unless you may move back into it in the near future.

fxsts12

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Re: Case Study: My rental property/tax break
« Reply #2 on: October 24, 2014, 08:59:20 PM »
Over the next 27.5 you will depreciate the cost of the building not the land and almost have a paid off property.  It also provides a great tax shelter. It can be painful at first but the longer you hold onto it the better position you will be in. Eventually 1031 exchange for a future retirement home and never pay recapture taxes. Will the 30k minus selling fees return 280k plus appreciation? Rent does seem low based on the mortgage.

edited
At market value 280k -16.8k (realtor commissions) you lose a lot just to exit. Your depreciation should be about 8.3k per year. Based on your income you can deduct up to 25K in passive losses per year against income. Overall if you stated you would lose 2k and gain 8.3k in depreciation annually for a net profit of 6.3k. This should change your mind by knowing it is still profitable. The interest rate is good and lower than you can finance an investment property for. In 30 years you have a 100 percent cash flow property.
« Last Edit: October 25, 2014, 09:52:38 PM by fxsts12 »

maki

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Re: Case Study: My rental property/tax break
« Reply #3 on: October 24, 2014, 10:53:30 PM »
Heh, it almost sounds like you purchased a home here in Hawaii. Prices here average $370,000 for an apartment, which rents only for about $1,600/mo.

One thing to consider is the opportunity cost on your lendability. With a mortgage, your debt to income ratio is influenced, which may hinder your acceptance for other mortgages/HELOCs/etc.
« Last Edit: October 24, 2014, 11:07:49 PM by maki »

Setters-r-Better

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Re: Case Study: My rental property/tax break
« Reply #4 on: October 25, 2014, 06:35:03 AM »
Yikes,  that is pretty bad.  Any chances you could significantly raise the rent? Do you think it will bring in more rent as a vacation rental? 

GrayGhost

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Re: Case Study: My rental property/tax break
« Reply #5 on: October 25, 2014, 07:12:03 AM »
Monthly rent, on this property, is just under a half of 1% of property value. In comparison, professional landlords prefer that monthly rent be at least 1% of property value.

As for vacation renting, well, if you can eke out some cashflow with that, that's worth looking into, but keep in mind that it's a whole different can of worms that's rarely discussed in detail on this site.

But the MMM perspective on real estate, which I believe is the only sane perspective, is that you're in it to make money. And right now this property is costing you money. Perhaps not that much money just yet, but once you consider taxes, maintenance, and other issues, you're likely to spend a good few thousand bucks a year on a place that you don't even live in!

So I'd say that right now, you're on damage control. Standard renting is pretty much out for this property. If vacation renting works out mathematically, go for it, but if not, I'd look into selling. Then I'd compare each of these options and figure out which puts the least strain on your wallet, and take it.

As for keeping it because you've locked in a good loan?... eh. 4.5% isn't very good at all. Why not sell? If you ever want to live in a similar house in the future, you can buy it then. Unless this is a custom-built home, the market will provide, and likely at cut rates!

Bob W

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Re: Case Study: My rental property/tax break
« Reply #6 on: October 25, 2014, 07:44:48 AM »
You will lose 20k in selling costs.  Keep it forever.  By the way by renting you are probably violating your mortgage contract.  Does your insurance know you're renting?   Would buy homes in markets like that.  You would have been better off renting.   

waltworks

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Re: Case Study: My rental property/tax break
« Reply #7 on: October 25, 2014, 07:47:10 PM »
And why is it that you can depreciate the structure? :)

OP: sell, sell, sell. You have a horrible rental and you are going to lose money like crazy barring incredible appreciation.

-W

Over the next 27.5 you will depreciate the cost of the building not the land and almost have a paid off property.  It also provides a great tax shelter. It can be painful at first but the longer you hold onto it the better position you will be in. Eventually 1031 exchange for a future retirement home and never pay recapture taxes. Will the 30k minus selling fees return 280k plus appreciation? Rent does seem low based on the mortgage.

arebelspy

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Re: Case Study: My rental property/tax break
« Reply #8 on: October 26, 2014, 08:35:50 PM »
By the way by renting you are probably violating your mortgage contract.

I doubt it.

Does your insurance know you're renting?

Definitely change your insurance to a landlord fire policy if you haven't yet.
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Handlebar Harry

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Re: Case Study: My rental property/tax break
« Reply #9 on: October 28, 2014, 11:31:11 AM »
Eventually 1031 exchange for a future retirement home and never pay recapture taxes.

I think this is the direction I'd head in. Your total "loss" would definitely be cheaper than paying the taxes/fees for selling right now. Put it into an LLC (I believe it's required to perform a 1031 exchange?), change your insurance to a landlord fire policy, and find something else that follows the traditional rental guidelines.

Overall if you stated you would lose 2k and gain 8.3k in depreciation annually for a net profit of 6.3k. This should change your mind by knowing it is still profitable.

I like your thinking fxsts. It helps soften the blow, but I wouldn't keep it solely for this "net profit". One major maintenance issue could really throw a wrench into that logic.
« Last Edit: October 28, 2014, 11:33:50 AM by Handlebar Harry »