Tax Writeoff – Rental

[23109VC]

I posted a question regarding possibly renting my house, albeit negative. I’d lose money every month.

If I no longer occupy the home, and rent it out – I believe I no longer can claim all the home interest and taxes as a writeoff/deduction. Instead, I have to declare the rent received as INCOME and then the costs are expenses. In my case, the expenses (interest, taxes, depreciation, other misc costs) would easily outweigh the rent I recieved – to a tune of at least $1300 a month.

If I can only claim $1300/month as a “loss” I will have a much smaller deduction – as I currently write off about $2000/month in mortgage interest. I know I can write off some of this “passive” loss against my income, but I earn about $125k/year and I hear that some of this loss may get phased out at my income level.

If I do rent my house, I may just have to rent a home to live in in the new area I move to. Once again, I don’t get a write off on th rent that I pay at th enew place.

I know it’s probably illegal – but how often to people who rent out their homes, never report the home as a rental, never report the rents received, and just continue to write off the home interest as if they lived there.

Is it one of those things you aren’t supposed to do, but “everyone does it”, or would this be a one way ticket to getting nailed to the wall by the IRS.

I’m moving, and my house if for sale in this horribly slow market. If my house will not sell, I may be forced to rent it to ultimately relocate. If the tax benefits of renting the house end up being LESS than when I lived in the house – so that I pay more in taxes by renting it than I did living in it – the effecitive amount I will be “negative” may be even bigger than I am calculating.

Any suggestions or advice?

[powayseller]

Re the IRS play: renters meeting certain income criteria can claim a renters’ credit, and I read once the purpose was to let the IRS match up renters with the landlords who should be claiming landlord status.

[rockclimber]

A note about Rich’s comment on depreciation: I rented out my place for about 2.5 years before selling last Oct. I had to “pay back” all the depreciation that I claimed upon selling the property. If you plan to sell in the future, you should look into this.

[23109VC]

My monthly mortgage is $2300.
MOnthly taxes are $300.
I pay $100 to my gardner – who I would keep on so my yard stays intact.
I pay a bit less than $100 for insurance, and I honestly don’t know if it would stay the same, or go up/down slightly once I convert to a rental. Assume it stays the same.

So monthly CASH needed to keep the property going is $2800.

I can rent it for $1500-1600. $1600 would be the max. $1500 is very realistic, and I have no doubt I could have it rented in less than a month for $1500-1550.

As to depreciation, I don’t know what my basis would be on the home – I know you calcualte it via the value of the *structure*, not the land…and I believe my house/structure assessed at $200k on my tax statement – but my home is “worth” about $425k – so maybe I could fudge the number up a bit….assume a $200k basis, which I believe i depreciate over 27.5 years.

So about $7200 of additional “losses”.

Also factor in that my mortgage is NOT one of those ARMs, or interest only loans. I think about $300 a month goes to principal on my loan right now. So each year, I would be paying down my loan by about $3600.

I have a payoff of $365,000. My house is on the market for $425k. So assuming it’s really worth that much, I have $60k in equity.

IF I sell, I lose 6% to the agents, plus another $5k in escrow fees. So assuming I sold at current list price – I’d walk away with about $25k.

I honestly don’t think it would sell for list price right now. Maybe it would sell between $400-$415k. So I could sell it at $400k, and between the realtor fees and escrow fees, I’d just unload the debt, and walk away with no cash in hand. I might get $10-15k out of it if I sold on the high side.

If I rent it out – I am going to have to come up with $1300 in cash each month, but I would technically get $300/month back into my equity, and I would have some tax writeoffs/deductions to offset some of the loss/pain.

I make enough money that I would be able to rent an ok house in the area I’m moving to. I probably wouldn’t be able to buy, and I’m not sure I want to at this point. The only thing I could comfortably afford would be a small condo/townhome in the $330-350k price range. I”ve found some that my family and I would be ok living in – but we wouldn’t want to be in one long term.

I’m partly concerned about the tax implications. If I rent my hosue out, and try to factor in all the losses and the small pricnipal pay down – I can find myself rationalizing keeping the house – albeit LONG term.

I then wonder if I did rent it out – should I rent or buy in the new market. If I rent a house, I wont’ be able to write off what I pay in rent. I can’t buy the house I would want, but I probably could easily rent the house I would want to live in. I could afford to buy a condo that I would be tolerable of – and get a write off – but it would not be the place I would want to live long term.

I can rent a nice house for $1600-1800 in Temecula or Murrieta. That same house would cost $500-550 to buy. I’d have to do 100% financing to buy a house that expensive, and my monthly payment would be $4000 a month at least. I can’t afford that and rent my house out.

Given the above numbers, does it make financial sense to rent my house out? How much would it actually “cost” me – when tax breaks, depreciations, principal pay down, etc are all factored in?

Given I can rent a house that I would genuinly LIKE – for $1800 – does it make any sense to buy for $500k – even if I coudl afford it?? Seems no since renting is cheaper.

Would it be better to rent the hosue I like at $1800 a month, or buy a condo I would “tolerate” at $3000 a month – given that the condo would have a write off and effectively cost me less than $3000.

I am the sole breadwinner. My wife stays at home with our two small children and does not work or earn an income. I make $125k a year working for the gov’t.

thanks a TON for the advice.

[23109VC]

without giving me *ADVICE* – what do you think are the pros/cons?

or anyone with some basic tax skills – who could give me an idea as to what my house/rental would actually *cost*?

[powayseller]

You wouldn’t get back $300/month in equity if your house is depreciating at 12% annually. You’d be losing $40K/year in equity. If you ever need to sell, you’ll end up owing the bank money, and be in bankruptcy. This could happen if the cash flow drag gets to be overwhelming.

As far as getting the actual numbers, you ought to consult a CPA. May I suggest Michael Gallon, from Savage & Gallon in El Cajon, at 619-440-4780. I don’t benefit from giving out his name. He’s a sharp guy w/ extremely low overhead, so his prices will be good. He could maybe do a phone consultation for you.

I can see why Rich wouldn’t want to give advice. There are some landlords on this forum, and they’ll probably check in during the week.

My question would be: Why would I want to hang on to a depreciating asset? If you believe housing will bust, your only thought would be to unleash the darn thing as fast as you can. In 1999, the answer would be different. In a rational or appreciating market, rental property makes sense.

As far as renting in the new place: I have 3 kids and pets and we love our rental house. We just sold our house in January, and will rent for many years, until prices bottom out. I’ll be watching for leading indicators of a recovery before we buy again.

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