My current primary residence is a condo with great equity. As I begin my first investment endeavor, I have the following questions:
Here is my objective:
To buy an additional condo to rent in order to gain equity in time and sell for profit.
Here are my challenges / questions:
Do I have to rent my current condo out and live in the one I purchase? (I don’t want to)
If I rent out the new one, how do I avoid capital gains taxes? ( I think it would be considered an investment property since I am not claiming it as my primary residence and is subject to capital gains taxes?)
I would ideally like to rent out the condo I purchase and continue to live in mine.
No, you don’t have to rent out your current condo, why would you? You can live in your current condo and buy 20, 30, 50, or 1,000 more, all for rentals.
You don’t pay capital gains tax on rental income. If you sell the new one down the road, then you’ll have to tax on it. If you sold the condo you are living in, you could avoid $250K in captial gains tax ($500K if married) if you’ve lived in the condo for 2 of the past 5 years.
You need to figure out all the math ahead of time.
First you can buy the second condo as a non owner occupied commonly referred to as NOO on the financing board. That rate is typically 1/8 to 1/4 of a point higher than OO (owner occupied) as it’s considered a higher risk mortgage.
You can deduct everything related to the rental property as a business expense such the condo fee, taxes, insurance, etc. If you pay points for the mortgage, you’d have to spread them out over the life of the loan. You also get to deduct 1/27.5 of the purchase price of the condo over 27.5 years. Normally on a single family you can only deduct the improvement to the property and not the land itself as land doesn’t depreciate, but I think on a condo, you can deduct the whole amount. Better doube check with an accountant about that one.
When you want to sell, you’ll be taxed on your gain. If you hold on to it for more than a year, then it’s long term capital gains, less than a year, short term capital gains. You’d probably have to hold for a few years to see a gain anyway.
You can defer capital gains by doing a 1031 exchange and buying another like kind property within 45 days of the sale.
If you have enough of a down payment, you may be able to make this cash flow. Condo’s in my area are usually the worse type of investment to get cash flow from because of the high purchase price, the monthly condo fees and the relatively low rent in relation to the mortgage, however they’d probably cash flow if you had a 30-40% down payment.