Johnnymac

I am curious if any of you own or have owned property as an investment. I am thinking of buying a condo or townhouse to then rent out but I have a lot of concerns. The housing market in the DC area is out of control so I think I'd be lucky to break even on the mortgage vs the rent. I think there are significant tax advantages in this though (mortgage interest, depreciations etc....)

Any thoughts would be appreciated.

attgig

somebody correct me if i'm wrong, but i don't think you can claim mortgage interest nor property taxes on rental property in your deductions

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Cubsfan

http://www.jacksonhewitt.com/resourc...ction=resource

Sounds like you can deduct taxes and interest. However, you also have to declare the income from rent as rental income.

If the rent you get is going to equal your mortgage, I'd say it's not worth it. You still have to take care of things if something breaks, and still have to pay the mortgage if you can't rent out the property.

I've heard that you need to be able to rent out a place for 6/5 (1.2 times) of your mortgage, in order to account for the above.

wxtwiztidxc

I dont know about DC but in San Diego its a good idea. I actually rent a condo from my parents and all i know is the value of the property here doubles in less than a year. That may be the only way you could make some money.

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ray

San Diego, Los Angeles, NYC, San Francisco

Those are definitely 4 markets where no matter how the remainder of the country is performing, will always continue to rise. I've been keeping an eye on house/condo/townhome prices here in the Los Angeles area and although they have stabilized, I really don't think that they will drop as severely (if they even drop) as the rest of the nation's metropolitan markets.

I intend to stay in Los Angeles for at least 5 more years and I am pretty confident that if I did pay such a high price for a piece of property in the next 6 months, that in 5 years if I decided to sell, I would still make money. Why?

The demand is so incredibly high out here and there will always be people willing to pay an inflated price. As much as I want the market to settle down, the reality is that it probably won't.

Before you buy a property for investment's sake, I would speak with an accountant or visit a website like HR Block and read about what items can be deducted from your personal tax returns and learn more about the tax implications of having the rental property.

Best of luck! Let us know what happens.

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speedracer120

The words of my naggin gramps, "Land is wealth boy, land lasts, land is it in investments, not your kids (he meant my uncles and aunts whom he considers ingrates), not your friends, nothing, land is it."

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wxtwiztidxc

Location, Location, Location...
Hey cracker why dont you buy a condo in San Diego, then you rent it out to ME and just think of the profit there! haha

Chgoman

Buying investment property (once you have researched it and are ready to make a knowledgable purchase) is one of the best investment you can make. You have to have patience and knowledge to deal with tenants and problems, but if you are discerning about what property you buy and who you rent it to, it can be great. In the long run, a good rental property will greatly outperform stock market averages and most other types of reasonable investments.

You are able to deduct mortgage interest, taxes, HOA dues, maintainance, depreciation, and much more against the rental income. In good real estate and rental markets, it can be hard to find a property that breaks even the first year on a cash flow basis, but it can be done. If you are at break even, you will likely experience some type of loss cash wise due to unforseen expenses or maintainance, but when you factor in paid in equity through the loan and depreciation benefits for taxes, you will still probably have a profit. When the cash flow will actually start to build is when rents start to rise in the area.

johnnymk

I learned something recently about depreciation which really surprised me. A friend of mine owns a home in NJ which he has been depreciating for approx. 6 years.

I believe the formula for depreciation is for a 25 year period now, but I am not sure.

Anyway, he said that if you keep the rental property for the entire 25 year period and have calculated that it will be worth zero dollars at the end and then sell that property for,let's say $250,000, the capital gains would be for $250,000.

So, assuming that you are in the 25% tax bracket or whatever it will be in the future, the tax would be $62,500. OUCH!!

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Chgoman

I believe the depreciation ratio is 27.5 years.

When you depreciate a property you are actually onle depreciating the improvements to the property (not the land). if you buy a home worth $250,000, $75,000 may be allocated toward improvements and $175,000 toward the land (check your tax bills for the allocation). In this case you can only take depreciation deductions on the $75K. If you fully depreciated the property, your basis would still be $175,000.

The advantage to depreciating a property is that when you take the depreciation deduction on your taxes you are lowering your gain or increasing your loss on the property which will be taxed at your highest tax rate (takes a little profit off the top or increases the loss which is tacked onto your income). For many people this will be 25% or higher savings.

When you sell the property you have to recapture the depreciation and pay taxes on it, but it is taxed as a capital gain (like stocks), so if you have owned the house at least one year, you will only pay 15%. Overall you end up with a net gain for having depreciated the property.

FYI, some people are still operating under old tax laws which allowed you to choose whether to depreciate the property or not. If you didn't you wouldn't have to recapture the deprec. later. Under current tax laws even if you did not take the deprec. you still have to recapture and pay taxes on it.

pain2010

Only buy at a discounted price. Use other peoples money if posible. Research the area you are wanting to buy in. Go to an real estate club, most of them the members will help you and have houses for sale. Their are deals out their to be found. My dad has been given 3 houses, just take over payments. Want meore info just email me.

Johnnymac

Where would one find such a club?

Thanks for all the posts everyone.

johnnymk

I believe his house was worth approx. $110,000 6 years ago. Assuming the property was worth $40,000 then and let's say $70,000 today, does that make any difference in the capital gains calculation?

Chgoman

Here's the idea using the same example earlier.

Purchase Price $250K (Cost Basis $250K)
Land $175K/ Improvements $75K

Lets say you've owned the property 10 years and taken $27K in depreciation (rounded to the thousand) and during that time the property value has gone from $250K to $400K. Most of the gain in a properties value is attributed to the land value for tax purposes, so now the numbers look like this on paper:

Value $400K (Cost Basis $223K due to depreciation)
Land $352K/ Improvements $48K (Original $75K - 27K in dep.)

You have a gain on the property of $177K ($150 in equity growth & 27K in depreciation) Under current tax laws if you sold the property you would own taxes on the 177K. If you moved in and lived there for the last 2 years, you would be able to tax the personal tax exclusion of up to a 250K gain which applies to the 150K growth, but this doesn't apply to the 27K in dep. you have to recapture and would owe long term capital gains taxes on.

All this is the simplified version as things like closing costs and property improvement and such add to the cost basis of the property.

johnnymk

In your example, the land was worth more than the house. As far as I can tell, around here, the house costs more than the land.

And I believe this is generally true in unpopular areas.

(When I said property in my example, I should have stated land)

However, when the property values go up dramatically (land plus improvements) you are saying that for tax purposes, it's always the land value which goes up?

If that is true, then it appears there is little value in depreciation, especially when you have to pay additional capital gains tax on it(in addition to the capital gain on the property).

It just appears that it's a loan from the government with no real tax advantage.

Chgoman

Different areas may vary, I live in Southern California where property prices are crazy, so most of the value is attributed to the land and most of the growth is also attributed there. I don't know if this is the case where values are more normal.

Depreciation isn't going to make you rich, but it will save you some money on the gains (paying 15% capital gains later instead of paying your marginal tax rate now), and allows you to defer paying taxes on some of the gains on your property until you sell the property. If you hold the property for a long time or do a 1031 exchange when you sell the property you may not have to pay the taxes for many year or even decades, if ever.

pain2010

Its called jaxreai.com and they have one for allmost all citys in the us. Here is the national one http://www.nationalreia.com/ i hope its ok to link them. Oh by the way just e-mail me if yoiu want more info.

attgig

hoa fees are deductable too?!?!!

does that mean if you own and live in a community, those HOA fees are deductable?

ray

If you are receiving a payment on a property that you own, then hoa fees would be deductible. If you own the property, live in it and are not recognizing rental income, then I don't think it's deductible.

Chgoman

For the home you live in (don't rent out), your mortgage interest and property taxes are deductible. Without a home office, not much else is.

If you have a rental property, pretty much any expenses other than home improvements (which add to the cost basis of the home) are deductible, which does include HOA fees or any management fees.

Sesshomaru

I'm looking into commercial real estate, and I want to get aerial shots of certain places to get a good picture of the development and where it's going. There's not much on the web, and I haven't gone to the library. Does anyone know of a good source?

I remember Microsoft use to have a database where you could type in your address, and it would pull up an aerial shot of your house. It probably wouldn't be up-to-date enough to work, but does any have that URL?

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zippyjuan

THere are a couple of sites I think. The Microsoft images are about ten years old and probably not the resolution you want, but here is one you can try: http://terraservice.net/

This may be more what you are looking for: http://www.globexplorer.com/

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Johnnymac

Wow my whole hood was a farm in 88. Gotta love sprawl.

Sesshomaru

You're a'ight Okay, now to go make a couple million bux...

guiseppewv

I am actually getting started in the rental business I am debating about claiming the income directly on my tax returns w/o setting up a business or setting up a rental business as an LLC. Anyone have any ideas on the pros and cons?

This has been a really good thread so far.