Archive for the ‘tax’ Category

7 Reasons to Live in a Fixer-Upper House While You Repair It

Tuesday, June 18th, 2013

Turn a Rental House into Your Home; Then Your Home into a Rental House?

For small fixer upper house investors, like my wife and I, it can pay off big dividends to move into the future rental property that we are repairing. We don’t always do it this way, but we find there are compelling advantages to this technique. These advantages include:

1.) Reduce Financial Strain

We don’t have to make house payments on a property that has no tenants paying rent. In other words, living in the house while we repair it is better than having it empty. If I we live in it, we make the mortgage payment that I would normally have to make anyway. However, if we tried to repair the house, while still living in another house, we have two mortgages to pay, until we can finish repairs on the new house and then rent it out.

This can be a real strain on the budget, especially when repairs go on longer than anticipated. What we like to do is to turn our former home into a rental house and move into the fixer-upper. We usually plan to stay in the new residence anywhere from 6 months to 2 years.

2.) Better Loan Terms

We get better loan terms as an owner occupant. Interest rates on a loan can be one percent lower if we purchase the house as an owner occupant, rather than as an investment property. The less we pay each month during the repair process, the better.

3.) Learn Repair Skills

Instead of rushing through the repair process and having to contract out much of the work, in a more drawn out process we can take the time to learn new repair skills. It also affords us the luxury of being able to make mistakes and learn from them. For me, at least, that is an integral part of the learning process.

4.) Make More Money When Renting

Because of the lower loan terms and lower monthly mortgage payments, when we later rent the property out, we can turn a tidier profit each month. Or, we can make it more attractive to potential tenants by offering to rent it at a lower price.

5.) Accommodates Our 8-5:00 Jobs

Feverishly repairing a new rental property nights and weekends, puts a strain on my wife and I, since we both have day jobs. Stretching out the process reduces the stress level considerably.

6.) Get to Know the House

A slower repair process allows me to really get to know the idiosyncrasies of the house. Later when tenants request repairs, my in-depth knowledge of the house may make these future repairs easier.

7.) Reduce Taxes If We Sell

Although, we believe in the buy-and-hold strategy, if we live in the house for two years and decide to sell, we can sell without paying federal capital gains taxes. If the capital gain is less than $500,000 for couples, the sale of the house is never reported n federal IRS forms.

One Caveat

If you follow this strategy and have a family, expect to live under some primitive circumstances for awhile until you start to get things ship-shape. My kids are thrilled at camping out in a new house, and as long as I get the showers working fairly quickly, my wife is happy. If you take the perspective that it’s an exciting adventure, you won’t be disappointed.

 

Related Articles

 

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“Turn your home into a rental” on Mark Wayne Show

 

7 Reasons to Live in a Fixer-Upper House While You Repair It

 

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The 5 Rules on How to Lose Money and Get Your Rental Property Trashed by Tenants

 

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How I Got Started In Fixer-Upper Houses

 

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Claiming a Tax Exemption When Selling a Home That is Now a Rental

Wednesday, October 10th, 2012

I’d like to share with you a recent question that I received from a reader of my blog. The question was:

“I lived in my primary home for two years and now it’s a rental, can I sell it without paying capital gains?”

My “short” answer is:

That depends on how long the house has been a rental.

No need to push when  selling your primary residence

By Way of Background Information

The 1997 Taxpayer Relief Act was a great boost for average people who wanted to sell their home and buy a new one. It was also a great boost for investors. Couples are allowed to exclude up to $500,000 of the capital gain on the sale of their primary residence. Single individuals can exclude up to $250,000.

In other words, the sale of the house is never reported on your federal IRS forms if the capital gain is less than the $500,000 and $250,000 limits.

This exclusion is based on compliance with two requirements:

1.)  The home must have been the primary residence for both spouses during two of the last five years. The two years do not have to be consecutive but if you rent out the primary residence for more than three years you would be required to occupy it again for two years.

 2.)  The exclusion is available only once every two years.

What if you sell you house and your capital gains exceed the established limit?

Capital gains above $250,000 for singles and $500,000 for couples are taxed at the applicable rate.

What if you sell your house before meeting the two year requirement?

If you qualify under one of the “unforeseen events” listed in  Internal Revenue Service Publication 523 Selling Your Home, such as a job change, illness or an unusual hardship, you can still qualify for a prorated exclusion.

The Ideal Strategy for the Pathologically Conservative Investor

Typical conservative investor.

Utilization of this tax exemption is the safest investment strategy for the conservative investor who wants to take few risks. This is the type of investor who wears both suspenders and a belt to hold up his pants. They like to play it really safe.

Under this strategy, the investors can qualify for the least expensive type of  loan, the owner-occupied loan. There is no need to worry about tenants destroying your rental property or not paying the rent. You completely control the investment by living in the property yourself. When you sell, you have the opportunity to make up to $500,000 tax-free profit every two years.

So, following that long-winded, yet surprisingly informative, background spiel, my “final” answer to the question is:

If you have lived in your house 2 of the last 5 years, you are entitled to take the exemption.

 

Coming Soon!

How to Turn Your Home into a Rental House, Instead of Selling It

Tax tips, forclosure houses, and self directed IRAs for real estate investors (video)

Saturday, March 17th, 2012

It’s an honor, once again, to have tax accountant, Sean McCoy, E.A., Chartered (PC), discuss tax tips for real estate investors, particularly in light of the looming deadline to submit income taxes.

Today Sean will discuss:

1. Changes to the tax code that affect real estate investors;
2. Issues related to purchasing forclosed properties;
3. Pros and cons of self-directed IRA accounts to purchase real estate; and,
4. Tax considerations when owning out of state properties.

Here is the complete YouTube interview.

How I Claim a Tax Deduction for Travel to Rental Properties

Wednesday, January 4th, 2012

Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. This includes driving costs incurred for rent collection, meeting your tenants to handle their problems and going to the hardware store to buy tools and materials for repairs.

In my case, I travel to my rental properties frequently, usually just to do a drive by and make sure everything looks like it should.

I used to drive by one of my properties on a daily basis, because I was having trouble with the tenants. They were pretty good tenants for the first two years that they were there, then things started to slowly unravel the next two years. They started paying their rental checks later and later. They weren’t keeping up the front yard. They were having large parties.

Finally, the cops had to come to the house and break up a party, and that was the last straw. I evicted them (by simply canceling their month-to-month contract). Now, I don’t drive by the property so frequently, because we have more reliable tenants.

To claim these travel tax deductions, you must keep a travel log, and just write down the milage each time you travel for landlord related business.The travel claim is made on Schedule E of your tax forms.

You allowed around 50 cents per mile by the IRS. The amount changes over time on the tax instructions, so you must verify how much it is each year. You just mulitply the number of miles that you have driven by the amount allowed per mile, and that is the amount you enter as your deduction.

The Best of Carve Out Your Niche 2011

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Critical Tax & Investment Tips for Real Estate Investors

Saturday, March 19th, 2011

My interview with the inimitable Tax Accountant Sean McCoy. Sean has 31 years experience doing taxes and shares his wisdom with us in this video. He is also a Business Appraiser and a Licensed Fiduciary.

Sean responds to the following questions. Some of his responses may surprise you.

1. What are some common mistakes that real estate investors make on their tax returns?

2. How will real estate investors be affected by new tax laws?

3. What types of investments do you see as the wisest to make right now?

4. What other tips or suggestions might you have for real estate investors?

Serial Home Sellers, Part 6: Examples

Saturday, January 19th, 2008

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A “serial home seller” is one who buys a house, moves in , repairs it to increase its value, sells at a tax-free profit up to $250,000 ($500,000 for married couples), and then does it over again. Thanks to the 1997 Taxpayer Relief Act (or, Internal Revenue Code 121) investors can create a profitable home fix-up business with a tax-free “payday” every 24 months. Below are two examples of people who became serial home sellers.

Suzanne Brangham (from her book Housewise)
Also, see my Amazon book list Safest Ways to Invest in Real Estate.

Suzanne was looking for work in San Francisco when she discovered that there were 25 other people competing for each available job, some willing to work for peanuts just to have a view of the Golden Gate Bridge. She didn’t want to work for peanuts. At the same time, she was looking for a place to live. She found a dilapidated old apartment house in a well-to-do neighborhood where you pay 4 times the price for 4 times the view. They were advertising apartments for sale or rent.

Suzanne made an offer to the sales manager that in lieu of paying the $800 per month rent, she would renovate the 2 bed/2bath apartment, spending the equivalent of one year’s rent, $9,600, in labor and materials. She also requested a year’s lease option, an agreement to rent with an exclusive option to buy at anytime during or at the end of the year. The asking price was $45,000. The sales manager agreed.

The job was done in four months, and at a party she was hosting, someone offered her $85,000 for the apartment. She exercised her option to buy the apartment, then sold it for the $85,000. Then, she contracted to buy a second apartment from the same manager. She put 10% down no a 4 bed/3 bath $90,000 apartment, and used the rest of her earnings for renovation. When the renovation was done, she had an offer for $140,000.

From that auspicious beginning she went on to buy 71 more houses and apartments.

Ruth Donohue

Times Online, in “Confessions of a Serial Home Buyer,” interviews Ruth Donohue, who has gone through the cycle several times and says that she does it more for the joy of the process and a love of the challenge. She is able to instantly spot a house with potential and visualize how the renovated home will look.

Ruth’s son Nick is also catching the bug. When they drive by a house, Nick will point out that the roof line just doesn’t look right. “Give me a boy until he’s five and I’ll show you an adult serial home renovator,” she says.

Husband Kevin sums things up by saying, “The family know they’ll always have a roof over their heads, they’re just never sure which roof it will be.”

Getting Started

Suzanne Brangham encourages anyone to join her in her chosen field, saying, “Home wrecking (house renovation) is for anyone who wants to begin marching down a delightful path toward security strewn with appreciating assets. Whether you want to sow the seeds of an empire or simply start a little venture of your own, what could be more natural than buying, renovating, and selling houses?”

What could be more natural indeed.

Thanks to Connie at conniebrz.com for her re-review of my book!

Info on Terry’s Book

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Tax Exemption for Serial Home Buyers/Sellers, Part 2

Tuesday, January 8th, 2008

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How it works

Utilization of this tax exemption is one of the safest investment strategy for the conservative investor who wants to take few risks, not to mention for fixer upper house investors. Under this strategy, the investors can quality for the least expensive loan, the owner-occupied loan. There is no need to worry about tenants destroying your rental property or not paying the rent. You completely control the investment by living in the property yourself. When you sell, you have the opportunity to bring in up to $500,000 tax-free money every two years.

Here is an example to show how the exclusion works, illustrated in Table 1. You and your wife file jointly and you continuously buy and sell homes over the years, each time purchasing a more expensive home as a replacement. Let’s say that you bought a house for $300,00. For the last 5 years you have owned the home and it is now worth $600,000, with $300,000 worth of accumulated gain. If you were to sell your home now for $600,000, without the tax exemption you would be subject to a capital gains tax on $300,000. The amount of taxes saved with the tax exemption would be $84,000. Table 1 also illustrates other amounts of gains.

Table 1
Home Selling under the Taxpayer Relief Act Exemption
(assuming a 28% tax bracket)

Home/ purchase price/sales price/ capital gain/ tax saved

#1/ $150,000/ $200,000/ $50,000/ $14,000
#2/ $200,000/ $300,000/ $100,000/ $28,000
#3/ $300,000/ $600,000/ $300,000/ $84,000

Ownership and Use Tests

To qualify for the tax exclusion, you must pass both the ownership and use tests. This simply means that during a 5-year period, ending of the date of sale, you have:

1.) Been owner of the house for 2 years (ownership test)
2.) Lived in the home for w years and it was your main residence (use test)

Maximum Amount of Exclusion

A total amount of $250,000 can be excluded if all of the following are true:

1. You meet the ownership test
2. You meet the use test
3. You did not exclude the gain from another home sale during the 2-year period

A total amount of $500,000 can be excluded if all of the following are true:

1. You are married and filed a joint return for the year
2. Either you or your spouse meets the ownership test
3. Both you and your spouse meet the use test
4. Neither you nor your spouse excluded gain from the sale of another home during the 2-year period ending of the date of the sale.

Can You Get a Partial Exemption?

Unforeseen circumstances may allow you to claim a reduced exclusion if either one of the following is true:

1. You did not meet ownership and use tests due to :
– a change in location of employment
– health problems
– unforeseen circumstances (see below).

2. Your exclusion would have been disallowed because you sold more than one home during a 2-year period, except that you sold the home due to :
-a change in location of employment
-health problems
-unforeseen circumstances

Unforeseen circumstances can include:

1. Death
2. Divorce or separation
3. Not eligible for unemployment compensation
4. Multiple births from the same pregnancy
5. Damage to the home from natural disaster, war, or terrorism.
6. Condemnation, seizure, etc.

In these cases, the amount of capital gains tax the could be excluded would be based on the number of months that the home owner lived in the home during a 24-month period. If a home owner couple lived in their home for 12 months, they could exempt 50% of the $500,000 exclusion, or $250,000.

What are the advantages and disadvantages of becoming a serial home buyer/seller using the tax exemption?

The next installment we will examine that question.

Serial Home Seller Tax Exemption, Part 3

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