I would sell your rental, but not pay off your mortgage. Invest the money, with the idea of retaining the principal, and using the interest and gains to subsidize your lifestyle. You can make more than $2k a month off $500k, even if your average return is 5%, paying off the mortgage on your current house will hurt your tax bill! and the rate is likely lower than 5%.
I have pretty basic knowledge when it comes to taxes and houses/mortgages. Can you explain how paying off our current house hurt our tax bill? Is it cause of the sudden influx of cash? Isn't selling property exempt from capital gains taxes after two years? Or is this something else?
When you sell a rental property, you do not get the allowance you would get for selling a personal residence, so the amount you sell it for above your basis is taxed heavily if you do not roll the $ into a new investment property. The capital gain tax rate can be ugly depending on your income/tax bracket!
I'm confused why you would have to pay capital gains- is it different than the 200k gains that you don't have to pay when you live in a property?
yes, you only get the exclusion if you lived in the home for at least 2 of the previous 5 years. Also, if she is depreciating the property she will have recapture all of that money expensed.
I have pretty basic knowledge when it comes to taxes and houses/mortgages. Can you explain how paying off our current house hurt our tax bill? Is it cause of the sudden influx of cash? Isn't selling property exempt from capital gains taxes after two years? Or is this something else?
When you sell a rental property, you do not get the allowance you would get for selling a personal residence, so the amount you sell it for above your basis is taxed heavily if you do not roll the $ into a new investment property. The capital gain tax rate can be ugly depending on your income/tax bracket!
Post by imojoebunny on Apr 17, 2014 14:42:06 GMT -5
I am curious as to why so many would go through the pain of being a land lord, when they could sell the place, net close to 400k after all sales cost including taxes, and invest 400k at 5%, not hard and very likely (20k a year) vs, 24k a year in rent on a property that needs maintenance (all houses do).
Utterly baffled by this... But I spent my morning at a plumbing supplier trying to figure out how to solve a problem at a rental house without forking over my kids 529 contribution for the year.
I bought my last carrier with the money I made offloading all my junk at OUAC. Although I did also spend a bit of money there on summer clothes for DD...
I am curious as to why so many would go through the pain of being a land lord, when they could sell the place, net close to 400k after all sales cost including taxes, and invest 400k at 5%, not hard and very likely (20k a year) vs, 24k a year in rent on a property that needs maintenance (all houses do).
Utterly baffled by this... But I spent my morning at a plumbing supplier trying to figure out how to solve a problem at a rental house without forking over my kids 529 contribution for the year.
You can't guarantee a 5% income stream on the investments. Her issue wasn't that owning the rental was a lot of work, her issue was a shortage in her budget. With only that factor presented it doesn't make sense to give up an income stream that could probably be adjusted to meet her shortfall.
When you sell a rental property, you do not get the allowance you would get for selling a personal residence, so the amount you sell it for above your basis is taxed heavily if you do not roll the $ into a new investment property. The capital gain tax rate can be ugly depending on your income/tax bracket!
I think the poster meant you would no longer be able to deduct your mortgage interest if you paid off your current home.
My bad! bunch is correct, the interest is what would affect you with paying off your primary residence (it will most likely make it to where you will only qualify for the standard deduction rather than higher itemized deductions). What I linked was informaiton on the taxes you will pay on the sale of your rental home.
I am curious as to why so many would go through the pain of being a land lord, when they could sell the place, net close to 400k after all sales cost including taxes, and invest 400k at 5%, not hard and very likely (20k a year) vs, 24k a year in rent on a property that needs maintenance (all houses do).
Utterly baffled by this... But I spent my morning at a plumbing supplier trying to figure out how to solve a problem at a rental house without forking over my kids 529 contribution for the year.
You can't guarantee a 5% income stream on the investments. Her issue wasn't that owning the rental was a lot of work, her issue was a shortage in her budget. With only that factor presented it doesn't make sense to give up an income stream that could probably be adjusted to meet her shortfall.
Uhm, last time I checked $400k in investments in the bank could cover a $200 shortfall in the budget for I don't know, 166 years? And if she is living off the $2000 a month + the shortfall, it can cover for 15 years, even if she just put it in her mattress, and her rental has 0 expenses and no tax implication... Yeah, still don't get the appeal of keeping the rental. While you can't guarantee a 5% return in the market! you can't guarantee a good rental market for the long term either, both have risk, at least the market is easier to diversify than one house in a specific place.
I'm confused why you would have to pay capital gains- is it different than the 200k gains that you don't have to pay when you live in a property?
You pay capital gains on a residential property if you don't meet both the ownership and use tests:
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
Period of Ownership and Use
The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time.
You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale.
One more thing to keep in mind is you will pay 25-30% capital gain taxes if you don't take the money and put it back into an another investment home and haven't lived it in for at least 2 years in the last five.
My understanding is that the long term capital gains rate can range from 0-20%, with 25% only for that portion of the basis taken as depreciation for 2014. Most people will be at 15%. Where is the 25-30% coming from? I know some states also have capital gains taxes.
We have a rental in DC and have looked on and off into selling it and those are some rough numbers we estimated. You are right that there are other factors such as depreciation and improvements that can play into numbers but basically DC screws you for being a landord ( so freaking tenant friendly) and for wanting to get out to the landlord business.
I am curious as to why so many would go through the pain of being a land lord, when they could sell the place, net close to 400k after all sales cost including taxes, and invest 400k at 5%, not hard and very likely (20k a year) vs, 24k a year in rent on a property that needs maintenance (all houses do).
Utterly baffled by this... But I spent my morning at a plumbing supplier trying to figure out how to solve a problem at a rental house without forking over my kids 529 contribution for the year.
Given that she is in a strong rental market, she has a reliable income stream. I know some utility companies pay 4% dividends but I would think (do not know this particular RE market) that even those conservative stocks carry more risk than continuing to hold the property. Then when you factor in the large hit she would take in taxes, selling becomes even less appealing.
If I was her I think I would take some of the money out of the house so I could get some additional expenses to offset the taxes on rental income and I would invest that cash (although not in this current market). Of course, this assumes that being a landlord is not too time-consuming for her.
Well, for us, when our landlords jacked the rent on our fairly shitty basement suite to $1200/month and we could buy a house for $1400/month mortgage, they got too greedy and we went and bought.
Really, I'd look around a bit for comps and make sure you're pricing your rental competitively. And then if you still feel a bit short, I'd trim some budget fat before I'd think about selling the rental. Or look at ways to make that much more money in a month, if that's plausible.
I agree with you in theory, but those of us here in Seattle know she could get more if she wants to.
You can't guarantee a 5% income stream on the investments. Her issue wasn't that owning the rental was a lot of work, her issue was a shortage in her budget. With only that factor presented it doesn't make sense to give up an income stream that could probably be adjusted to meet her shortfall.
Uhm, last time I checked $400k in investments in the bank could cover a $200 shortfall in the budget for I don't know, 166 years? And if she is living off the $2000 a month + the shortfall, it can cover for 15 years, even if she just put it in her mattress, and her rental has 0 expenses and no tax implication... Yeah, still don't get the appeal of keeping the rental. While you can't guarantee a 5% return in the market! you can't guarantee a good rental market for the long term either, both have risk, at least the market is easier to diversify than one house in a specific place.
We've considered buying a rental property to help diversify our portfolio. My husband is a VERY conservative when it comes to investing in the market, so we look at rentals as another source of passive income. Like any investment, you have to know the risk/exposure and try to minimize or mitigate it, and understand the upside as well.
I agree with you in theory, but those of us here in Seattle know she could get more if she wants to.
But probably not in comparison to how much the house is worth. XD It's a weird ratio that's different here. No one is going to pay 4.5k to live in my ~1000sqft house. XD
Oh absolutely not. You need to stay competitive in the market, which funny enough niq and I both think is $2200.
You can't guarantee a 5% income stream on the investments. Her issue wasn't that owning the rental was a lot of work, her issue was a shortage in her budget. With only that factor presented it doesn't make sense to give up an income stream that could probably be adjusted to meet her shortfall.
Uhm, last time I checked $400k in investments in the bank could cover a $200 shortfall in the budget for I don't know, 166 years? And if she is living off the $2000 a month + the shortfall, it can cover for 15 years, even if she just put it in her mattress, and her rental has 0 expenses and no tax implication... Yeah, still don't get the appeal of keeping the rental. While you can't guarantee a 5% return in the market! you can't guarantee a good rental market for the long term either, both have risk, at least the market is easier to diversify than one house in a specific place.
I think cjeanette is envisioning living only off of investment returns, not eating into principal? It's hard to match the rental income given what you can get out of a lot income-producing investments these days (bonds, dividends) etc. I think. The last meeting I was in nearly gave me an aneurysm..
spunbutterfly how many months' of emergency expenses (one income, no daycare) does your e-fund cover? If you put the back half of it in something income producing, and then move it into something more growth oriented once the cash crunch ends, would you be in the black (I mean, ignoring my finding unaccounted-for funds from the Daycare FSA )?
Yes, I was not talking about touching principal. Even then there are still tax implications to the earnings on the investments, even those you aren't spending if they are earning dividends and capital gains.
I am not saying selling isn't worth at least considering I just feel it isn't the best choice with the information we have here.
Uhm, last time I checked $400k in investments in the bank could cover a $200 shortfall in the budget for I don't know, 166 years? And if she is living off the $2000 a month + the shortfall, it can cover for 15 years, even if she just put it in her mattress, and her rental has 0 expenses and no tax implication... Yeah, still don't get the appeal of keeping the rental. While you can't guarantee a 5% return in the market! you can't guarantee a good rental market for the long term either, both have risk, at least the market is easier to diversify than one house in a specific place.
I think cjeanette is envisioning living only off of investment returns, not eating into principal? It's hard to match the rental income given what you can get out of a lot income-producing investments these days (bonds, dividends) etc. I think. The last meeting I was in nearly gave me an aneurysm..
spunbutterfly how many months' of emergency expenses (one income, no daycare) does your e-fund cover? If you put the back half of it in something income producing, and then move it into something more growth oriented once the cash crunch ends, would you be in the black (I mean, ignoring my finding unaccounted-for funds from the Daycare FSA )?
Yeah, I can see why it's hard to beat the average market return these days, since last year, the average return for mid/large cap mutual funds was about 20%, so OP would have had to suffer with 80k in gains. Of course, the average is lower for the last 20 years, but far and away better than 4.4% that OP earned, assuming no expenses, no taxes, which is unlikely. The average was 9.2% for S&p for the last 20 years, but hey, what do I know. I have 4 rental units, al, with mortgages that offset income and we can't write off depreciation. OP, go talk to someone who knows what the hell they are talking about. You have a golden goose egg. Make it work for you, and end the worry about $200 a month.