Well, my market here in Northern California is soft now. There are houses just like mine on my street for much less than I would want to sell mine for. So, I have decided to take a plunge and turn it into a rental. I have a couple questions though. The market rent for my house is about 1800/month (I already found a renter by the way). I pay 2,100/month. Therefore, I am in a negative cash flow situation. I dont mind the 300/month loss but I wanted to know the best way to handle it. Do I not tell my mortgage provider that I am not living there anymore? Do I tell my mortgage provided to turn it into a non-owner occupied home? If so, will that effect the interest rate I already have on the loan? What are the tax advantages of each? Thanks for your help!
Hello? Any help with this one would be appreciated. Thanks
your lender will not carry if you rent it out. You will need to call you insurance company and change the insurance
you will have to file a ScH E in which you will list interest paid as an expense against rental income.
however, this is going to COST you thousands of dollars a year; this is an Alligator. Covering the mortgage is just the beginning of the shory; what about taxes, insurance, repairs, etc , etc
The good thing is that those are already being paid by him currently. He’ll also be able to start depreciating the asset after he converts it to a rental which, if the cost of the home is that high, can offset alot of the negative rental income he’ll experience based on the income tax savings. A $250,000 home has an annual depreciation of $9090. If you’re in the 25% tax bracket area then that will account for $2272 per year in income tax savings. These are rough numbers so your actual mileage may vary.
IMHO, a rental should always be analysis with all cost loaded in.
also, the passive loss from SchE is limited for filer with AGI above $100k (married) and completedly suspended above $150k. I don’t recall what the numbers are for singles. Thus, it is possible that the paper losses due to depreciation, and cash losses will be suspended until either he sells or have a low year of income.
Bottomline, this puppy is going to consume CASH.
Just to clarify a previous poster, the lender doesn’t CARE that the property is no longer owner occupied, I think in the fine print it just says that they expect you to occupy the property for at least a year. You do need to switch the insurance policy to a fire and dwelling policy as the insurance company could deny a claim if they found out it was being rented out so you’d be paying for insurance and have no coverage.
Also keep in mind that if you sell, sell within 3 years and there’s no capital gains tax although I do think you may need to pay a recapture tax because you depreciated the place while you had it. Rule is that if you lived in it for 2 of the past 5 years there’s no capital gains.
aak5454…I think the bottom line is that a neg cashflow at this point is better than eating the whole sh!t sandwich, know what I mean? Something is better than nothing i.e BK, foreclosure, etc.
Nate-WI
in the original post, the poster mentions nothing about being in financial trouble; just seems to not accept the fact the market has “crested” in his area. This Calif market is going to take many years to settle out and will be bumpy. It took take 5 years (or more) for the poster to get his “what I want for my house price” again. In the mean time, he may have shoevled in $50k and in the 3 yrs he will loss his Sect 121 cap gains exception. IMHO, this is a high probability that prices in many areas of Calif will be equal or lower 3 years than they are now.
Thus without know more details, I think there is very little upside for waiting and hoping the market get better and meanwhile take a loss every month. In some ways, he probably would be better to sell now and take the tax-free proceeds/profits and find a new investment property.
Mike in Calif.
do you have enough equity to refi? If you’ve been in the house for 15 years, you might refi the balance out to 30 years and really drop the payments to make it cashflow.
Hey MC,
Being your a CPA I got charged 2K last year for my taxes. They did one house visit to set up quickbooks with me, and initial meeting, and during tax season I went into their office and got my books in line with what they wanted. I got the bill and had to pick up my jaw from the pavement. This seemed very high. I understand there are lots of variables here but I did the balancing, categorizing, sub accounts, etc. It was my first year in REI and they’re whole thing was that it will be cheaper each year cause I will learn the ropes and have it down pat. Your thoughts on this and how you charge clients,
Nate-WI