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Starting Rental Property Question

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Starting Rental Property Question

Old 08-25-2020, 12:09 PM
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Default Starting Rental Property Question

Wife and I are thinking about buying another house. Current house is solely owned by my wife, bought before we met. We are thinking that we'll keep the current house as a rental property. Property is in the State of FL and will be an annual lease so no short term rentals.

Question is how to recognize the revenue from the rental and what exactly can be considered an expense on a rental property.

Do we need to create an LLC to funnel rent payments through? Both our names or just her name?
Would home insurance, mortgage, property taxes be expenses?

Just trying to get a rough idea of what all we will need to do. I do have experience in operating an LLC but not in this sector so my experience is of the more clerical stuff like setting up the LLC with Sunbiz, taxes, etc.

Last edited by joshscott84; 08-25-2020 at 12:22 PM.
Old 08-25-2020, 12:31 PM
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All costs to hold the property or deductible in one form or another. Carrying costs including insurance, yard maintenance, snow removal, etc are current deductions. Repairs are current deductions. Repairs that extend the life of the asset (like a new roof) are typically capitalized and depreciated. you need to review what capitalized costs may be currently deductible under Section 179 or bonus. At the end of the year there are passive activity rules that may come into play limiting the availability of losses to offset other active income. Your accountant can give you all the detail.

if the house has appreciated you also risk the loss of the lifetime home sale exemption.

It most cases i will never understand the notion of keeping a primary residence for a rental without a full economic analysis of the transaction. More often than not it does not make economic sense. this is where you need to start.

Many will advise using some form of entity to hold the property for legal liability reasons. for a single long term rental get good insurance as you are still exposed for the homes value. State specific but an LLC or similar may help protect your other assets from liability.
Old 08-25-2020, 12:38 PM
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I wouldn't bother putting in LLC for a single property ...

You will incur additional expenses - transfer taxes, legal fees, separate tax returns, accounting fees, etc ...

Expense RET, Insurance and all Repairs at a minimum...

Just run the income / expenses in your personal account ...
Old 08-25-2020, 12:38 PM
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pro tip, when you do things ( with in reason ) to your home, put the reciept in the rental pile for write offs! they are not going to come around and check to see where the paint went too! new couch, yup went towards the rental house! new a/c yup rental house! new flooring, yup rental house! you get the point!
Old 08-25-2020, 12:44 PM
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Yep just cash the checks and buy umbrella insurance if you don't already own it...
Old 08-25-2020, 12:48 PM
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As an ex landlord I can say invest in a case of Tylenol. And remember a hand shake doesn't mean the same thing it used to. .
Old 08-25-2020, 12:54 PM
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Hire a property manager. I got the call while I was on vacation this year: AC was out. Told my manager that I authorized him to replace it and resumed my vacation. Worth the 10% right there.
Old 08-25-2020, 12:54 PM
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Do a search of how many people used to be landlords....
Old 08-25-2020, 12:56 PM
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My experience has not been good with rental property in Miami FL or St Augustine. Just can't get a high enough cap rate to make it worth the while. Put problem tenants on top of that (including family, never rent to family, write that down), and it is just a marginal investment
Old 08-25-2020, 01:02 PM
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I guess the one thing I'm most confused about is the mortgage area. We'll use a round number to make things easy. Lets say mortgage is $1k a month and we charge comparable to neighborhood of $1500. Without deducting the mortgage payments it seems like I would have a fair amount of new taxable income. What am I missing here? A lot I'm sure.
Old 08-25-2020, 01:06 PM
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You have to take into account taxes (ok maybe that is in your payment to the bank), maintenance (yes things break), and at least a 5% vacancy allowance, tenants move. I think that $500 "profit" is more like $250 when you get done looking at all the real costs.
Old 08-25-2020, 01:41 PM
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Originally Posted by Vitamin_Sea View Post
Hire a property manager. I got the call while I was on vacation this year: AC was out. Told my manager that I authorized him to replace it and resumed my vacation. Worth the 10% right there.
Definitely good advice here.
Old 08-25-2020, 01:45 PM
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Originally Posted by joshscott84 View Post
I guess the one thing I'm most confused about is the mortgage area. We'll use a round number to make things easy. Lets say mortgage is $1k a month and we charge comparable to neighborhood of $1500. Without deducting the mortgage payments it seems like I would have a fair amount of new taxable income. What am I missing here? A lot I'm sure.
you will deduct the mortgage ... its an "expense"
Old 08-25-2020, 01:46 PM
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Originally Posted by triplenet View Post
you will deduct the mortgage ... its an "expense"
Ok that's exactly what I thought but everyone kind of danced around that.

Last edited by joshscott84; 08-25-2020 at 03:41 PM.
Old 08-25-2020, 01:47 PM
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Originally Posted by joshscott84 View Post
I guess the one thing I'm most confused about is the mortgage area. We'll use a round number to make things easy. Lets say mortgage is $1k a month and we charge comparable to neighborhood of $1500. Without deducting the mortgage payments it seems like I would have a fair amount of new taxable income. What am I missing here? A lot I'm sure.
does having a rental property accomplish any financial goals, or is it simply easier than selling? If the latter, put in the work and sell it.
Old 08-25-2020, 01:53 PM
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Remember - Florida forbids discrimination based on race, color, national origin, religion, sex, family status, or disability.
However - it does not forbid consideration of employment status, occupation, citizenship, wealth, type of car, or political affiliation. Or even favorite football team!
When I run a rental ad on CL, I post a Trump 2020 photo. In general, that will get you better quality tenants.
Old 08-25-2020, 02:01 PM
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You can not deduct the mortgage. The interest yes but not the principal. Sell the primary and take the tax benefit and reinvest your money where you would like. Do not pass this up. If you convert to investment property not only do you forfeit that great advantage but the you will have to recapture deprecation when you do sell.
Old 08-25-2020, 02:17 PM
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Originally Posted by autobaun70 View Post
does having a rental property accomplish any financial goals, or is it simply easier than selling? If the latter, put in the work and sell it.
Actually, Just remodeled the house and we have the it about half way paid off. It's a starter home so we're looking to get a bigger space for our family. We feel like it's a bad move to let the property go. Educate me here until I can find a professional advisor.
Old 08-25-2020, 02:23 PM
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Another expense is the depreciation of the house. This is a deductible expense that offset the profit from the rent money. Often the depreciation can exceed the rental income. In that case you may be able to show a loss, further reducing your tax burden from your job (assuming you are employed, and don't have a THT level salary). Best to consult a tax advisor.

Good luck.
Old 08-25-2020, 02:24 PM
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Originally Posted by triplenet View Post
I wouldn't bother putting in LLC for a single property ...

You will incur additional expenses - transfer taxes, legal fees, separate tax returns, accounting fees, etc ...

Expense RET, Insurance and all Repairs at a minimum...

Just run the income / expenses in your personal account ...
Shouldn't be a separate return necessary as long as it is a single member LLC, not taxed as an S-Corp. (Rarely would you ever own real estate in a C-or S-Corp.)

Accounting fees will be the same but could be higher if you run it through your personal account and give them bank statements and have them pick through everything. I would get a separate account and then provide CPA list of expenses and maybe bank statements so they can keep in their records in case it is ever audited. If it was audited and it was commingled in your personal account, the IRS will want to see those statements to make sure you are reporting everything. Take it from me, it adds considerable time when you run business and personal through one account and the IRS audits you. Not likely to happen but just something that is easy to avoid if you start it off right.

You can only deduct the interest on the mortgage but can recoup the basis in the home, not land, through depreciation over 27.5 years. Basis is lower of initial cost or FMV at time of conversion to rental property. This means usually it is original cost but after the RE crash in 2008, it was hard to say FMV was higher than if the property was purchased in 2006.

Any ordinary expenses like insurance, management fees, taxes and repairs can be deducted. Some repairs will have to be capitalized but your CPA will help with that. Your property taxes will go up since you will lose any homestead exemptions.

Like BACKTOTHESEA said, you might want to talk to someone before you do this. It may be better to sell and use the 2 year exclusion on capital gain. Once you turn it into a rental, you can run out of time to use the exclusion and even if you can take it, you will have to recapture any depreciation taken. If you convert it back to principal residence after it is a rental it makes the exclusion more complicated.

If you have a loss, you may or may not be able to take it. There is also QBI to consider. I'd talk to your CPA and they can fill you in about everything.

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