Thinking of Renting our Place

[cube_rat]

I really would like to move for various reasons. Mostly, I dislike our place. I hate the stairs, layout and constant harleys. And now I have a new neighbor (a renter) who thinks it's OKAY to play his booming car stereo while pulling in and out of the driveway. The plus side is, we're in a beautiful neighborhood adjacent to the Golden Gate National Reserve, 1/2 mile to the ocean and great hiking trails.

We bought it as a fixer/upper and should've flipped it two years when we had the opportunity. If we sold two years ago, we would've netted about 150-160K, now if we sell, we would net around 125K with an original investment of 42K. Still not bad after two years, but I digress.

The current market rent is almost equivalent to our mortgage payment. There's property tax of $450 per month along with home owners assoc fees of $192/mo. If the rent we get for our place offsets the mortgage and we rent another place for the same amount ($1800/mo), then in theory our monthly costs should be a wash.

My concern is income taxes since we would shifting our property from primary residence to investment property. Then there's the whole mortgage thing. We signed papers on our refi stating this was our primary residence. I'm not sure what the implications are by turning our home into a rental.

Can someone provide some high level info on investment rental property taxation? Can one only take the depreciation against the building and amortize capital improvements versus being able to write off the mortgage interest and taxes?

Sorry for the long post. Also, I will be consulting my accountant, I'm just kicking around ideas right now.

thanks

[Arif]

My biggest concern would be taxes. IIRC as long as you lived in the house for two of the last five years then you'll get the 250k or 500k tax free. If you rent it out longer than that it would cost you a lot in taxes.

Quote:

My concern is income taxes since we would shifting our property from primary residence to investment property. Then there's the whole mortgage thing. We signed papers on our refi stating this was our primary residence. I'm not sure what the implications are by turning our home into a rental.

I wouldn't worry too much about the mortgage if you decide to rent it out. As long as you've lived in the house six months to a year then you should be fine. I am sure there is nothing in your loan docs that says you can't change your mine and rent the home out after a certain period.

Quote:

Can someone provide some high level info on investment rental property taxation? Can one only take the depreciation against the building and amortize capital improvements versus being able to write off the mortgage interest and taxes?

As a rental you get to write off the taxes, depr, interest, repairs, and amortize replacements of things like HVAC, roofs, etc.

[Martha]

You will depreciate the property, get to deduct expenses including mortgage interest and property taxes.

As Arif says, if you are not living there 2 of the last 5 years as of the date you sell the property you will take a big tax hit because you will lose the capital gains exclusion for your primary residence.

You will have to pay taxes when you sell on the depreciation you took.

Read your mortgage. Some mortgages require you to use the place as your principal residence so long as you have the home. Others have a time limit, like Arif mentions.

Another thing to think about is that tenants can be hard on property. They don't own it so sometimes they just don't take the kind of care that an owner would take. Because tenants don't keep up with the little maintainence things that owners do all the time (gee that needs caulking, that hinge needs fixing . . . ) the place can end up looking kind of tired after a few years. T