Investment Property Capital Gains

 
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Old 02-15-2018, 08:25 AM   #1
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Investment Property Capital Gains


I'm moving and considering turning my existing home into a rental.

As I understand it, if I sell it within 3 years, I won't pay capital gains taxes because I will have lived in it for 2 or the past 5 years.

If I pass that 3 years, do I pay gains on the increase in value from when I bought it or from when it turned into a rental?

It has increased a lot in value since I purchase in 2015.

Last edited by Golden view; 02-15-2018 at 09:08 AM.
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Old 02-15-2018, 10:54 AM   #2
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Re: Investment Property Capital Gains


From when you bought it. Actually, it's whatever the basis is at sale.

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Old 02-15-2018, 02:05 PM   #3
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Re: Investment Property Capital Gains


So if you keep it as a rental and take the depreciation say you bought at 200. Depreciated 3 years at 15 k per year. 45 k from 200 = new basis. 155k basis. Sold for 300k. 145k profit. If it was a primary residence for any two years in the last five there is no capital gains up to 250k. Once over that threshold capital gains would kick in.

Spouses can combine for 500k. The limit may have gone up. Cant remember.

When I sold my last home I asked my tax advisor to establish basis and he looked at me like I was from jupiter or something. But yes, 2 in 5 and that rental depreciation can be pretty sweet too.
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Old 02-15-2018, 02:07 PM   #4
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Re: Investment Property Capital Gains


Also, it used to be a lifetime limit of 250k per person. But now its just 250k limit on 2/5. You apparently can do it every five years now!
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Old 02-15-2018, 02:13 PM   #5
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Re: Investment Property Capital Gains


With rising interest rates I would think hard about holding it though.

This spring real estate season is going to have to swallow rates .6 percent higher, so far, and next year the new tax code will punish west and east coast high property value states with the more limited mortgage interest and property tax deductions.
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Old 02-15-2018, 03:22 PM   #6
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Re: Investment Property Capital Gains


I always look at this decision as asking would I buy the house for a rental for a couple of years, and then sell. If you wouldn't buy it at market price, you probably should sell.
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Old 02-15-2018, 06:02 PM   #7
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Re: Investment Property Capital Gains


Let's talk real numbers, I'm not shy.

Bought for $320
Would sell for $400.
Owe $240.
3% loan
Payment is $1700 incl insurance and taxes.
Would rent for $2000+
2015 home, maintenance is close to zero for now.

Seems like best two options are sell now or sell in 3 years before 5 years is up.
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Old 02-15-2018, 06:08 PM   #8
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Re: Investment Property Capital Gains


Quote:
Originally Posted by Golden view View Post
Let's talk real numbers, I'm not shy.

Bought for $320
Would sell for $400.
Owe $240.
3% loan
Payment is $1700 incl insurance and taxes.
Would rent for $2000+
2015 home, maintenance is close to zero for now.

Seems like best two options are sell now or sell in 3 years before 5 years is up.
I wouldn't wait, a lot can happen in the housing market in a very short time. Looks like renting would not net you a whole lot. There will be maintenance costs eventually, even if there isn't any now.
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Old 02-15-2018, 06:45 PM   #9
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Re: Investment Property Capital Gains


Quote:
Originally Posted by Golden view View Post
Let's talk real numbers, I'm not shy.

Bought for $320
Would sell for $400.
Owe $240.
3% loan
Payment is $1700 incl insurance and taxes.
Would rent for $2000+
2015 home, maintenance is close to zero for now.

Seems like best two options are sell now or sell in 3 years before 5 years is up.
For what it's worth, it'll be somewhat dependent on the tenant...that "$9,000 profit" could easily become "$12,000 in repairs" if they are cruddy renters...that said, they could be dream renters and the market could sky-rocket...

...or you could have dream renters and in 3 years the market crashes and you're still money behind...

It's a gamble. The safest thing is to sell it today and walk away with the cash tucked under your armpit...but...you could also be leaving thousands of dollars on the table!
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Old 02-15-2018, 06:58 PM   #10
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Re: Investment Property Capital Gains


So, you'd buy a house for 400 and rent it out for 2000+? Doesn't really sound right to me, unless it's going up to 520 in the next 3 years.

I'd sell.
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Old 02-15-2018, 08:06 PM   #11
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Re: Investment Property Capital Gains


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Originally Posted by hdavis View Post
So, you'd buy a house for 400 and rent it out for 2000+? Doesn't really sound right to me, unless it's going up to 520 in the next 3 years.

I'd sell.
It probably is going up to 520 in the next 3 years. It also might rent for $2500. The neighbor house is smaller and was listed for that. I'm a little detached from the rental market.

Still, I'm strongly leaning towards selling. An extra $140k in my pocket is appealing.

On the other hand, I could have this paid off in a few years and just make money off it. Add a second, then a third, etc. By the time I retire if I owned 3 or 4 outright that's all I'd need. Gotta start some time.

On the other other hand, I could own my main home sooner, invest in the business, save up cash and buy investment properties next time the market crashes.
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Old 02-16-2018, 06:52 AM   #12
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Re: Investment Property Capital Gains


OK, so you Don't know the rental market. If you're thinking about renting it out, you better learn.

Rule of thumb, rents go for 1% of the home value. They'll go higher if people have problems getting loans, lower when it's easy to get loans. This comparison for a market actually gives you an idea if homes are becoming overvalued.

If you rent it out, plan on putting $10k into it to get it ready for sale.

The question for you is the job market there going to keep growing for people who could pay for a $520K house? If yes, sell after 2-3 years, the potential appreciation would be worth the risk.
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Old 02-16-2018, 12:30 PM   #13
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Re: Investment Property Capital Gains


As a contractor you make money when the economy is booming. So it is very easy to be trapped into buying high when youre flush with cash and selling low when you're out of work. Of course that is the opposite of what we want to do. Personally I am all cash and won't be buying a rental or flip until I am NOT working. Then you know you're at the bottom of the market and there is money to be made.

Be fearful when others are greedy, be greedy when others are fearful.

The American consumer has releveraged themselves with enormous levels of debt and unemployment is the lowest it's been in 20 years. When the next crash happens between 7/2018 and 2/2019 it will be big and it will last awhile.

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Old 02-16-2018, 07:33 PM   #14
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Re: Investment Property Capital Gains


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As a contractor you make money when the economy is booming. So it is very easy to be trapped into buying high when youre flush with cash and selling low when you're out of work. Of course that is the opposite of what we want to do. Personally I am all cash and won't be buying a rental or flip until I am NOT working. Then you know you're at the bottom of the market and there is money to be made.

Be fearful when others are greedy, be greedy when others are fearful.

The American consumer has releveraged themselves with enormous levels of debt and unemployment is the lowest it's been in 20 years. When the next crash happens between 7/2018 and 2/2019 it will be big and it will last awhile.

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You flooring guys from Portland sound very similar...
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Old 02-17-2018, 05:19 AM   #15
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Re: Investment Property Capital Gains


Quote:
Originally Posted by Golden view View Post
Let's talk real numbers, I'm not shy.

Bought for $320
Would sell for $400.
Owe $240.
3% loan
Payment is $1700 incl insurance and taxes.
Would rent for $2000+
2015 home, maintenance is close to zero for now.

Seems like best two options are sell now or sell in 3 years before 5 years is up.
Based on those numbers, if you're looking to collect rents, and you're apparently in an are where values are going to increase 30% over the next 3 years (i.e. - $400K to $520K) you'd be better of selling, re-leveraging the gross profit into another home that's at a number that'll actually make you money in rents (1% and 50% rules) while realizing the appreciation on that house going forward...

Normally, if your monthly expenses, including mortgage, insurance, maintenance, etc. were less than $1000, that's a cue to keep your current situation in tact, but you're way over that... if you can get rents to $2500, that'll certainly help, but still not ideal...

But then again, if you truly believe the house is going to be worth another $120K over the next three years, that's a pretty big incentive to hold, as you made on paper an appreciation of $80K for the first three...

But there's other things at play here... how you set up the property ownership (i.e. - LLC, in your name, etc.), income distribution, etc.

No matter what you decide to do, it's a good position to be in...
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Old 02-17-2018, 10:12 AM   #16
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Re: Investment Property Capital Gains


Actually I made $80k appreciation in just 2 years. I question if that trend will continue. Hard to imagine a 1650 square foot spec home selling for $520k.

I'm pretty sure I'd have to look in another city to get a rental that falls into the typical rules. $300k just about gets your a condemned house here now.

I'm selling.
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Old 02-17-2018, 11:17 AM   #17
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Re: Investment Property Capital Gains


Personally I want to own a fleet of rental houses. Yes there can be problem tenants, but there are businesses that will vet them for you. Repairs, carpets, etc., are also a right off. Yes property value can fall, but you should be in investments for the long term and not care. Never pay a property off early as it is cheap money at +/-3.5%. You can make more in the stock market or other investments, like buying another rental house.

Your monthly costs for the house are around $1,700 (Why so high? Should be around $1,500). Therefore if you can get $2,700 a month it would be a wise decision to keep the rental long term. Not only putting $1,000 in your pocket every month, but the tenant is buying the house for you. Portland is a growing area, and rentals are a hot commodity.

Who is going to cut the grass, and maintain the property? If you can do it easily that is a major plus. If not find the local guy who does the neighbors houses and find out how much a contract costs.

Zillow should be fairly accurate on the rental market for your house. What does it suggest? Find out how long rentals take to rent in your area. Go talk to a rental broker and ask for their advice, as that is ALL they do. I once went to a rental showing, and there were about 10 people wanting to view it, at that moment, yikes! A rental in your area could never be empty for more time than it takes to wash the carpets and windows.
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Old 02-17-2018, 03:24 PM   #18
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Re: Investment Property Capital Gains


If your holding period is five years or less sell. If your holding period is ten years then plan to hang on and weather the storm.

There are a lot of luxury apartments going up, but not a lot of middle class single family units.

In the last recession the total number of households declined. So while you may think rentals go up when housing sales go down think again. People reduce housing costs by living together. Roommates, basement tenants etc... Rentals have been starting to experience some mild softness; my main rental management client has modestly reduced some rents this winter.

The other tax strategy for long term holding is 1031 exchange. Generally most of the advantage from depreciation comes in the first ten years. Then you do a 1031 exchange to buy a bigger property and avoid capital gains.

Its the mid range time frame that I think is riskiest. Asset owners always do well over the longer term. Real estate is also an excellent hedge against inflation. It may be hard to find a solid return that will keep up with inflation if you're in cash; but rents generally keep pace with inflation and will accelerate the repayment of your mortgage the longer you hold.

With ballooning deficits inflation is definitely on the menu. Imagine what would happen if the Chinese decided they weren't going to buy any more treasuries?
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Old 02-17-2018, 04:22 PM   #19
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Re: Investment Property Capital Gains


Don't fall into the rental trap of thinking you're going to manage and maintain your rental properties. Evaluate it as if you'll hire all that out. Then, if you decide to self perform something, you'll at least know what crappy per hour pay you're getting.
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Old 02-17-2018, 04:58 PM   #20
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Re: Investment Property Capital Gains


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On the other other hand, I could own my main home sooner, invest in the business, save up cash and buy investment properties next time the market crashes.

This would be my first choice....

Having a mortgage on a rental sucks especially when the tenants stop paying and it takes time to get them evicted and you lose the income AND you have to pay the mortgage



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