Strategy Question to Lease Option or Rent Out.

General Real Estate Investing
1

Hello,
Situation: I currently own and live in a house and wish to keep the house in order to use the equity line of credit on it, but I am thinking about keeping the existing house as I go purchase the next house to live in.

I want to see if anyone has comments on whether or not my thinking is correct.

Here is my plan and more details on situation:

Current house valued at $930K. The house I am looking to purchase will cost about $1.1M, but is worth about $1.3M

a. Current mortgage is $589K owed, payments of $3175 per month.
b. I could rent the house out at $3500-$3600 per month.
c. If I lease option or rent my house out, then I could deduct about $30K per year in interest and depreciate the $930K for 27.5 years which is another $33K per year for a total tax benefit of about $63K per year or $5250 per month.
d. To me, it seems that it is costing me more to stay in the house than purchasing my next house.
e. The current house has appreciated significantly and to me seems that it would be a good retirement vehicle.
f. I think if I lease option it, I could go out 3 years and put a price of about $1.2M on it.

Looking at item c., is my thinking correct?

Thanks for any help on this.

2

It all depends on what happens to the tax benefit of home ownership! If they get rid of that sell it or depend strictly on the appreciation of the house! If not then your thinking is correct. What state is the house in? Lease options are starting to get scary in most states.

3

Thanks for the reply.
Both houses are in Virginia. My current house that I want to lease option out, or rent out. The other house I just want to purchase conventionally.

Does this answer the question?

Thanks,
Chip

4

I do not know how Virginia feels about lease option’s I would suggest getting an attorney to do the lease option contract! TO CYA ( Cover your assets) Other then that why not!!!

5

Will do. Thanks for your help!!

6

No problem! if you need anything else let me know and don’t be a stranger on this site!

                                                 Good day to you,
                                                            Robb
7

Bluechipdc, Robb is correct about the tax laws. There was a tax panel that recommended restricting the mortgage interest deduction. It is not law yet, but the fact that they are considering reducing this tax benefit has spooked the markets a little.

I’m not a tax lawyer or a CPA, but you might need to adjust your calculation a little bit. First, your depreciation amount is calculated from your adjusted basis in the property, not the fair market value of the property. This may be significantly different. Also, the tax benefit is the total amount of your allowable deductions multiplied by your tax rate.

So going by your $63,000 figure, assuming you are in the 28% tax rate bracket, your net after-tax benefit will be $63,000 x 0.28 = $17,640 per year, or $1470 per month. This does not include any alternative minimum tax you might have to pay because of these deductions.

But it sounds like your plan will work regardless of the tax considerations. If the property is still appreciating, and you are getting positive cash flow, the tax benefits are just icing on the cake.