Archive for the ‘taxes’ 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

 

6 Steps to Roof Maintenance (for the Home that will Turn Into a Rental House)

 

How I Evicted A Problem Tenant in 4 Steps

 

When to Hire a House Inspector – Radio Interview with Rich Peterson

 

Getting Rid of Bad Tenants

 

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

 

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

 

6 Steps to Roof Maintenance (for the Home that will Turn Into a Rental House)

 

Our First Rental House Plunge

 

10 Most Frequent Problems Found by House Inspectors

 

5 Steps to Get Your House Ready to Rent by Terry Sprouse

 

5 Steps to take if your house is flooded

 

Some perfectly legal ways to maximize your rental profits

 

Add “Start a Rental House Business” to Your Bucket List

 

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

 

Window Repair with #2 Son

 

Required Roof Maintenance for Fixer Upper Houses

 

Learn to Repair Your Fixer Upper Houses

 

How I Got Started In Fixer-Upper Houses

 

How to learn to operate a fixer upper house business

 

The Peaceful Warrior and Fixer-Upper Houses

 

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

* * *

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

.
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

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Serial Home Buyer/Seller Tax Exemption, Part 5 – sources of fix-up houses

Tuesday, January 15th, 2008

.
Sources of Fix-up Houses

For serial home buyers/sellers who utilize the federal tax exemption to pay no capital gains tax, a key to making the process work is to find lower-priced houses in need of repair.

There are good deals to be had even though we just operate on a part-time basis. The pros – the full-time investors – will get eye-popping deals, but there are still enough good left-over deals for us small time operators to get a share of the pie also. It’s like a yard sale. The people who get the huge bargains will be up before dawn, knocking on doors before the yard sales are scheduled to start.

Nevertheless, there are still some bargains left when the rest of us show up a little later in the morning. For my wife and I, finding good fix-up deals primarily involves reading the newspaper, checking the internet, and driving through neighborhoods.

A good source of fix-up houses are those repossessed by banks. These are houses where the owner cannot make the payments on his bank loan and is forced to leave the house when the bank takes it from them. Often the former owner will express his bad feelings toward the bank by destroying fixtures, doors, walls and other parts of the house. While this may give the house an unlivable appearance, most of the damage is fairly easy to repair. This is just the type of house the aspiring handyman investor is looking for, as it has built-in equity because the damage is only superficial.

A second source of good fix-up properties is from the Veteran’s Administration (VA) and Housing and Urban Development (HUD). These properties have had owners who cannot make payments on their loans from these respective organizations, and the VA and HUD have repossessed the houses and put them back on the market. VA and HUD houses are usually offered at a fairly good price, below market if they need serious fix up work done. As in bank repos, the owners have either let their houses run down and are generally in need of, at minimum a paint job, and sometimes a more major fix-up.

My Example

I purchased a VA home, in 2003, in a nice neighborhood that scared off many other investors because there had been water damage to the ceiling in both bathrooms. Upon close examination, I traced the damage to some cracks in the water cooler on the roof. Was it worth it to pay $105,000 for a house in a neighborhood where similar houses sold for $150,000 (and now sell for $200,000)? You bet it was. I could replace the cooler and repair the ceiling for $2,000 to $3,000. The remaining $45,000of equity went to the only person who took the time to climb up on the roof and thoroughly examine the cooler with a flashlight. That was me. HUD, VA and repossessed houses from other federal agencies can be found at the HUD/VA website.

To find bank repos and other fix-up houses, my wife and I carefully scan the newspaper classified ads every day and we spend weekends driving around areas where we might like to buy. We bought our first bank repo by responding to an ad in the newspaper. Based on the ad, it appeared to match all of our requirements, a fix-up house priced at below-market in a nice neighborhood. I visited the property with my handyman friend, made an offer and purchased the property.

To purchase VA and HUD repos, you can also pick up printed listing from real estate agents, some of whom specialize in such sales. Recently repossessed homes are generally listed every two weeks.

Serial Home Sellers, Part 6: Examples

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Part 4 of Serial Home Buyers/Sellers, What properties do serial home buyer/seller buy?

Saturday, January 12th, 2008

.
Serial home sellers buy houses, live in them for at least 2 years, and then sell them and pay no federal capital gains tax. The key to making a serial home seller business work is to find houses that you can add value to. How do they do this?

They buy houses below market value that need repair

We now know, if we didn’t know it before, that prices don’t continue to rise every year at 5%. In fact, it appears that house prices may continue to drop for several years into the future.

So, that means that we have to add value to the house. We must find houses in need of repair and bring them back to their former glory, to force the value of the house to go up.

I know, you’re saying, “But Terry, your answer to everything it to buy a fix-up house. You have been promoting that forever. That’s the name of your blog, and your book, and probably your dog.”

My response is, how did you find out the name of my dog?

Actually, my response is that this is not merely an improbable coincidence, but it actually is the way to make the system work. You must find the right house in need of repair to buy before you can expect to make any money when you sell.

Key Advantages of Fixer-upper Houses

The three great advantages of buying fix-up houses are:

1.) You buy them for much less than you would pay for
a normal house, so you spend less of your investment money to get in;

2.) Because the price is less, monthly mortgage payments are also lower than if you had bought a traditional house;

3.) After the repairs are completed, the house automatically increases in value, and is valued the same as other houses in the neighborhood. This is a faster and more certain way to add value, rather than having to wait for housing prices to appreciate.

Learn to Make Repairs

Another key to making the serial home buyer/seller approach work is to make your own house repairs, as far a possible, instead of paying someone else to do it.

Never miss an opportunity to do your own repair work. Think of it as part of your educational process. You lose two ways when you hire someone to do your work. First, you lose the chance of a free education, and second you lose the money that you would have saved by doing it yourself. It may take you four hours to change an electrical receptacle or fix a toilet that won’t flush, something a professional could do in minutes. Don’t be concerned, in the long run you have learned a skill to be used for the rest of your life.

To learn more about making repairs, read “So You Want to Learn the Zen of Making House Repairs” that I posted at Amazon.com.

Where you find these properties in need of repair? Tune in to the next blog installment.

Serial Home Buyer/Seller Tax Exemption, Part 5 – sources of fix-up houses

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Serial Home Seller Tax Exemption, Part 3

Thursday, January 10th, 2008

.
Advantages of selling a home every two years and claiming the exemption:

1. No more dealing with tenants

One of the biggest gripes of real estate investors is dealing with problem tenants. In fact, based on what I have heard from former investors that I have talked to, that is probably the biggest reason that investors decide to get out of the business. The next best thing to biting the bullet and learning how to deal with tenants through the school of hard knocks (or reading a copy of Property Management for Dummies), is to have no tenants.

Who wouldn’t want a world without tenants? It’s a dream come true! No more weekend calls about clogged garbage disposals and toilets not flushing. No more staying up late balancing the books. No more late payments and far-fetched excuses. No more rush to put the place back together and quickly rent it out again, when someone moves out. No more surprise midnight moves by tenants who get out under the cover of darkness.

2. Lower interest rate

Owner occupants can pay 1% less for their mortgages than people who don’t live in their investment properties. For a $200,000 house that can be an additional $132 a month, or $1,584 per year, that you don’t pay for your mortgage.

3. You control the whole process

If you become a serial home buyer/seller and move from one house to another every two years, you alone are in total control of your investment future. You’re captain of the ship.

Since you live in the house, maybe while you fix it up, you’re just making mortgage payments that you would be making anyway, if this wasn’t a business for you. So, you’re not out any extra money, except for the closing costs when you buy or sell.

If you decide you want to live in the house a few years longer, no problem. You can live there as long as you want to, 20 years if you like, and still take the tax exemption.

But you can also decide to buy and sell every few years, and each cycle buy a nicer home, like Suzanne Brangham did, as described in her book Housewise: the Smart Woman‘s Guide to Buying and Renovating Real Estate for Profit. She started in San Francisco in 1972 when she couldn’t find a job that she liked. She decided to create her own career. She started by investing $9,600 in a condo and wound up renovating and selling 71 houses and apartments.

Regarding self-reliance, Ms. Brangham says:

“The biggest lesson I learned in the property business in that there are no absolutes except yourself. Prices fluctuate; products change. Markets move up and down. Tax laws are rewritten every year. Interest rates are as predictable as unwired champagne corks. But there is one stable element in all of this: the person who renovates for profit.”

Disadvantages of utilizing the exemption every two years

1. No long-term profits

In addition to losing the headaches associated with tenants, you also lose many benefits by selling rather than renting. You lose:

a. An monthly rent payment. Its easy to get used to those once they start coming in.

b. Tenants are gradually paying off your mortgage for you.

c. Tax deduction for depreciation and for interest on your loan.

d. You lose the long-term appreciation of 5% per year. Its nice to have the option of cashing in on that appreciation by selling off a house or two when you are ready to retire.

2. It’s difficult to time the market

This is not a disadvantage of the exemption as much as a disadvantage of operating a business of buying and selling every two years. Under this investment strategy, you may not be able to time your house buying and selling to accommodate the fluctuations of the market. For example, many would say that now is not the best time to sell. Some real estate analysts say that cycles usually last between 2 and 10 years, and naturally the ideal time is to sell is when demand is high and the prices are up.

A similar problem exists for buying your properties, you may be caught in a cycle when prices are artificially high.

——————————–

What is the secret to overcoming these seemingly insurmountable obstacles? Where do you turn? What’s that up in the sky? A bird? A plane? Who was that masked man?

The next installment of this series will address some of those questions.

Part 4 of Serial Home Buyers/Sellers, What properties do serial home buyer/seller buy?

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |

Tax Exemption for Serial Home Buyers/Sellers, Part 2

Tuesday, January 8th, 2008

.
.
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

Add to Technorati Favorites

Subscribe in a reader

Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |