Posted by Christy (TX) on July 17, 2002 at 22:02:44:
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Sell rent property - formerly personal residence? - Posted by Christy (TX)
Posted by Christy (TX) on July 17, 2002 at 17:05:44:
We are considering selling a rental property that was formerly our personal residence. We have to sell by Sept. of next year to avoid Capital Gains tax.
If we decide to keep this as a rental instead of selling, are we really going to lose money? If we decide to sell much later can’t we do a 1031?
Answer to your questions. - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on July 17, 2002 at 21:43:27:
Christy–(TX)----------------
You are right, if you hold for some years you can do a section 1031 tax-free exchange of it as an investment property for some other investment property of equal or greater value. Or a partially tax-free exchange if you exchange for something of lesser value.
Now, you have “converted” the property from your personal residence to an income property. Sort of. If you do sell before the deadline that you mention, you could still treat it as your personal residence sale, with the up to $250K per person federal capital gains tax exclustion. I think there is a little tax consequence, because you will have depreciated it for a while as an income property. So I believe there will recapture of the depreciate at 25% tax. Not a big deal.
Now, I suggest that you think about properties in terms of their “earnings efficiency.” There are some rentals that bring in a lot more rents than do other properties, for the same amount of investment on your part. One of the main factors is the market value of the property. Higher-priced houses, and apartments too, will be less earning efficient than will lower-priced houses in the same area. Thus, if you rent out four $50K houses you will get more than the rent you will receive from two $100K properties, which, in turn, will provide you with more rental income than one $200K house. So, my advise, if you are after cash-flow is to buy as cheap of properties as you can stand to own. This will tend to maximize your return for the amount of equity you have in the properties.
So, consider the house you were living in and now rent out. Is it a low-valued property or a high-valued one? Is it high or low rent earning efficient? Many investors live in nicer houses. These are the higher-priced properties. Thus, they are the lower-efficient rentals. It is often better for the investors to sell those houses used as their own homes and buy lower-end properties to hold for investing.
There is also an emotional factor. If the renters do not keep the property up very well, you will feel sick about it, remembering how nice it was when you lived there. This is less likely to be a problem with properties you buy strictly for rentals and with which you have little emotional attachment.
Good InvestingRon Starr**
formerly personal residence? - Posted by jeff
Posted by jeff on July 17, 2002 at 17:20:15:
i have a question myself here. since i have never been involved with sellnig my primary residnece that i am not currently living in, just becasue you lived there 2 out of the past 5 years, does this make the property eligible for the homestead exemption even if you are not currently residing there?
on the 1031 part, yes you are eligible for that since the property is an investment property as long as you trade it in for a like kind property and stay within the guidelines set forth.
losnig money by keeping it as rental? im confused on this part. how exactly are you gonna lose money? is the house scheduled to be burned down next year? wnot the property be there at a later date to sale if you decide to? if your worried about losing the money on the capital gains its very possible if you sale 30 minutes after your time frame runs up. if you want to keep it for 20 years as a rental your income and appreciation may cover and even surpass your losses. the 1031 will even rid you of some of those losses, or atleast prolong those losses until you cash out on your new investment.