Renting Out Current Home, Buying New Home
I am 25, looking to build up a solid portfolio of real estate. I currently live in a 2bed/2bath condo in portsmouth, VA. I paid 70k, approximatley 3 years ago. Current value is approximatly 110k.
My Plan is to purchase a new home, and rent out my condo for $950/mo (reasonable in my area).
For financing reasons, my lender insists on having a rental agreement secured on my condo prior to closing on my next home.
My question is this....with the appreciated 40K in my current residence, should I be concerned with converting this to a rental property for tax reasons. Might it be more advantageous to sell instead? The area is a strong area and I feel this property will continue to escalate over the next few years.
Secondly, (and perhaps this should be in a differnet forum), what is my basis for depreciation? The full 110k (less land) at the onset of rental, or the 70k (less land) that I paid originally?
Also, this is the first time I have done this. Any tips that can be provided would be appreciated. After reading this forum, I get the feeling I should probably form a single member LLC and quit claim the condo to it.
Im considering doing the same thing myself. Im new at investing but do have a couple things for you to consider. 1st if you rent your current home out you can sell it within 5 years and keep the entire profit free of taxes according tio the IRS home exclusion. If you decide to keep it after the 5 years do a 1031 exchange and defer the taxes.
Jeff is right. I have the same story. I bought a condo in 98 for 46K and today I am going to sell it for 180K. I took money out once as a downpayment for my now primary house. I would not sell the condo if you can cover or make money over your mortgage/HOA fees. You will have 3 years from the time you move into your new place to sell your condo with all capital gains excluded.
Dontaskwhy is right. You have 3 more years to rent to get the cap gain exclusion (live and own 2 of the last 5 years). You save max 15% of profit depending on long term cap gain tax bracket (=.15*40k=6k). You have to decide whether it will continue to go up at the 13k / yr rate to determine whether the 6k tax savings is worth getting out of the prop.
What I did was to find a tenant who is interested in buying it eventually. That way they take good care of it. I also was asked about a rental agreement, but when I still live in it how could I possibly have a rental agreement without moving out first...you get the picture. To make a long story short, the lender ended up giving me the loan without any rental agreement. To top it off, they asked me what rental income I expected. Keep in mind they take 75% of the rental income you expect to receive for the cash flow calculation. That assumes conservatively that your rental is not generating income for three months of the year...pretty ridiculous if you price the rent right according to what the market demands...lesson learned there, mark up the expected rental income for the lender's calculation.
I am of the opinion that LLC is overrated. I follow John T. Reed's advice not Kiyosaki's (www.johntreed.com). There are due on sale clauses if you quit claim to an LLC... your lender wouldn't be very happy with you. Just get a good tenant who might buy it in the future, specifically less than three years from when you move out. I'm trying to avoid 6% brokerage fees also by direct selling to the tenant.
The basis for depreciation is 70k less land and some other things....Get "Aggressive Tax Avoidance for Real Estate Investors" by john t. reed for a detailed guide on depreciation. Good luck! :-D