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Excellent board with lots of good ideas...

I am perhaps following the path that many have started out on, moving out of my current residence and converting it into a rental. This is a second residence I have had to keep in the city near my soon to be ending job; a condo in a 5 floor building that is about 65% rental properties. I have another set of friends doing the same thing.

Reading the posts so far have me a bit overwhelmed about the work and risk involved in renting the condo. If this works out, I would like to accumulate a few other condos in the building to rent, as I feel it is a pretty good building in a good location.

This will just be for a bit more cash on the side, not as a primary cash flow, but I certainly don't want to lose money or give it all away to a property management company, but I also don't know that I have the time to do it all myself.

What suggestions do you experts have to get started? Thanks very much for your time. Also, anyone here with real estate investments in Delaware?
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Check with your accountant for the best tax strategy.
You have tax advantages of owning your own home that get lost in becoming a rental.
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Thanks Foolucky. This residence is a second residence in the city, so we would be retaining our primary residence and tax benefits in the "country". I heard from an associate that if you have one rental property that was a residence that you have additional tax benefits, such as writing off the mortgage, compared to owning several rental properties. Anyone familiar with this?
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A business (owning many properties) can write off the debts (loans).
The advantage of a home is that you don't pay capital gains on the home. You do on income property.
SO if you have a large growth in value of the rental, you pay tax.
Large growth on home is tax free.
Now an advantage is to let the income property grow in value. Do tax free exchanges on these properties. Then one day buy a place you'd like to live. Rent it out for 2 years, remodel it then move in and live for at least 2 years. Then that place is free of cap gains tax.
You've heard me complain about tax free exchanges? Well, my property's in a LP, I can't avail myself of this loophole.
You need to have a cup of coffee with your accountant and discuss this.
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Hi Dave,

An individual can deduct the mortgage interest & taxes on up to two homes on schedule A. A second home (i.e. vacation or convenience home) does not qualify for the $250,000 single or $500,000 MFJ capital gain exclusion one can take advantage of on the sale of a principal residence. (hence, principal residence) So, you would not be loosing any great thing there.

If you were to turn the second home into a rental property then it is a business (although you do not have to incorporate or "set up" a separate entity) the mortgage interest and taxes along with many other items would be deductible on Schedule E (as opposed to Schedule A for personal homes) subject to limitations. This would be true if you owned one rental property or 100.

If you chose to set up a separate entity (i.e. corporation, LLC, partnership) then the same items would be deductible but to the entity not to you personally. If you are a partnership or LLC choosing to be taxed as a partnership then any profit/loss would flow through to you to be taxed on your personal return subject to limitations.

A good place to start would be to read the instructions to Schedule E which can be downloaded at www.irs.gov. Come on back with any questions or join us at the Tax Strategies board.

Just remember not everybody is cut out to be a landlord so consider all the options not just the tax benes.

Good Luck
cjbb



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Talk to your accountant- you could be giving up tax free money-you can have several "primary" residences- I believe that the only requirement is that you used it as your primary residence for 2 of 5 years prior to sale. This can be every other month otr two years in a row or every other day or whatever. Just make sure you know all the options before you leap.
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Hi Foolucky:

Now an advantage is to let the income property grow in value. Do tax free exchanges on these properties. Then one day buy a place you'd like to live. Rent it out for 2 years, remodel it then move in and live for at least 2 years. Then that place is free of cap gains tax.

So sorry to burst your bubble but if you ever intend to live in the property as a principal residence you have broken the "rules" of a Section 1031 exchange and thus the tax will not be deferred. The rules for the exchange are very broad about the type of investment property but very specific that it can NEVER be intended for personal use.

Have people done this and gotten away with it? Of course! People commit tax fraud all the time and get away with it but I would REALLY not be advocating that kind of thing to people asking advice! And if Dave takes your advice and is having a cup of coffee with an accountant that recommends this I would find another accountant...FAST!!

cjbb
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The rules for the exchange are very broad about the type of investment property but very specific that it can NEVER be intended for personal use.

And what if you chnage your mind 2 years after you do the exchange?

And how would the IRS prove that the intent was for it to be personal use?
They might be able to show it if the person says something to that effect.
Or *maybe* if the person sells 3 warehouses and buys a "rental" mansion with no expected cash flow.
But it is difficult to prove intent.


I'd say it's just as difficult as someone attempting to prove that a home buyer who signs an Owner-Ocuppied affidavit for a mortgage, and moves out 2 years later had an intent for it to be a rental / non-OO.
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Hi foo1bar:

According to foolucky the intent, as well as the plan was there from the beginning which is why I mentioned it. Of course intent is hard to prove. Everything possible should be done to avoid paying too much to Uncle Sam but to evade is still a crime. So if you intend to live in the house just pay the taxes! Of course by then we may not even have the gain exclusion for principal residence.<g>

Somehow foo1bar if you knew someone was intending to rent the home would you advise them to sign the owner-occupied affidavit for a mortgage? I like to think you wouldn't. Especially if it were on a home buying board where people ask advice.

cjbb
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if you knew someone was intending to rent the home would you advise them to sign the owner-occupied affidavit for a mortgage? I like to think you wouldn't.

rent immediately?
Or live there for 2 years and then rent it out?

rent immediately: not a great idea... signing it would be fraud IMO. (Of course I'd guess it's probably done anyhow...)

Live there 2 years, and then rent it out:
Hey, don't tell anyone that's your plan.
In fact, don't make that your plan when you're buying, but leave it as an option you can consider later.
And in 2 years if you decide to use that option, you're fine IMO.

[and I resemble that last one - I've been contemplating renting my current abode when I buy a larger one. I haven't figured out how it impacts taxes etc. yet though, so I don't know if it's a good idea or not. And I did just recently sign an owner-occupied affidavit without any worries of fraud or pains of conscience.]

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>>>So sorry to burst your bubble but if you ever intend to live in the property as a principal residence you have broken the "rules" of a Section 1031 exchange and thus the tax will not be deferred. The rules for the exchange are very broad about the type of investment property but very specific that it can NEVER be intended for personal use.<<<

1031's can turn your apartment complex to a vinyard that happens to have a residence for you to live. Is that wrong?
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Hi foolucky,

1031's can turn your apartment complex to a vinyard that happens to have a residence for you to live. Is that wrong?


IIRC you would have to allocate a portion of the purchase price to the residence which would not count toward the exchange, therefore paying tax on the portion of the proceeds allocated to the residence. (I'm sure someone will correct me if I recalled incorrectly)

So are you thinking when you sell the vinyard you would then want to be able to use the Sec 121 exclusion (the $250,000 or $500,000) to exclude the gain on the vinyard?? Sounds nice but fat chance! You would however be able to exclude gain on the residence since it was separated out in the purchase and paid for with after tax $.

cjbb



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