Converting Primary Residence into Rental

[Account Closed]

Hello,

My husband and I have wanted to invest in real estate for years now and recently made the decision to purchase a new home while converting our primary residence into a rental. Since we are both 100% disabled veterans, we each get the 100% property tax exemption and we currently don't pay properties taxes on our primary residence. Our primary residence is a 5 bedroom, 2.5 bath, 2 story home, built in December 2019... Our original plan was to buy a new home, using the VA Loan and rent out our current home (under the impression that we wouldn't have to pay property taxes on EITHER property).. He would have used his tax exemption for the rental and mine would be used for our new primary residence.

Fast forward... We have found the new home, put down earnest money, and signed initial contract docs. The home is perfect for our family. It has everything we need and I could definitely see us there long term. $468k home. We locked in a 4.2 interest rate. Bigger home, huge yard, plenty parking. But I've recently discovered that we can't use the property tax exemption on a rental property. It has to be used only on our primary residence homestead.. I don't know how we missed this major point, but this makes me want to back out and lose the 7k earnest money that was put down.. I wasn't expecting to have to pay property taxes, as this would increase our out of pocket costs by about 1k a month. I want to back out, but my husband still sees opportunity and is very motivated to keep going. When we have vacancies, we will probably have to pick up side hustles to stay afloat. This is not something that I'm interested in doing because I recently got my real estate license and want to focus on my career. But I am not making money in real estate at the moment and would have to get something quick. We also have 4 young children and I would have to remove my 2 youngest from daycare in order to save money. We would also have to cut back on saving until we find a renter. We currently have under 15k saved. 

His thing is... this is an Investment and yes, it'll be hard right now.. But in the end it'll all pay off. He also says we may not get an opportunity like this again soon. Low interest rate, bigger property, 3 car garage, huge yard for kids to play.. basically our dream home. I am just having trouble seeing the light at the end of the tunnel. We have a very comfortable life now and I don't want to complicate things by putting too much on our plate. I don't see how it's a good investment if we have to cut back on saving, find side hustles, or even struggle for a little bit while we have vacancies. Yes, we have always wanted to invest in real estate, but this isn't how I wanted to go about it. He says he has it under control, we won't struggle, and we'll be fine. He is also getting a hefty raise soon, so he is taking that into account. I am still worried. He is very driven and determined to make this work. Backing out is not an option for him. He brought up the fact that we could transfer the rental into our business name or a trust to avoid paying property taxes. Does anyone have an idea on how that works?

Overall, what are your thoughts on this situation? We close in a little over a month. Are there ways that we could get around the property tax like he says? How was your experience with your first investment property? Should I just suck it up because this is just apart of the game? I am new to this and it's all very overwhelming. I am in dire need of some advice. We need someone that could properly guide us so that we can minimize these road blocks in our future. Thanks.

[KC Pake]

Quote from @Account Closed:

Hello,

My husband and I have wanted to invest in real estate for years now and recently made the decision to purchase a new home while converting our primary residence into a rental. Since we are both 100% disabled veterans, we each get the 100% property tax exemption and we currently don't pay properties taxes on our primary residence. Our primary residence is a 5 bedroom, 2.5 bath, 2 story home, built in December 2019... Our original plan was to buy a new home, using the VA Loan and rent out our current home (under the impression that we wouldn't have to pay property taxes on EITHER property).. He would have used his tax exemption for the rental and mine would be used for our new primary residence.

Fast forward... We have found the new home, put down earnest money, and signed initial contract docs. The home is perfect for our family. It has everything we need and I could definitely see us there long term. $468k home. We locked in a 4.2 interest rate. Bigger home, huge yard, plenty parking. But I've recently discovered that we can't use the property tax exemption on a rental property. It has to be used only on our primary residence homestead.. I don't know how we missed this major point, but this makes me want to back out and lose the 7k earnest money that was put down.. I wasn't expecting to have to pay property taxes, as this would increase our out of pocket costs by about 1k a month. I want to back out, but my husband still sees opportunity and is very motivated to keep going. When we have vacancies, we will probably have to pick up side hustles to stay afloat. This is not something that I'm interested in doing because I recently got my real estate license and want to focus on my career. But I am not making money in real estate at the moment and would have to get something quick. We also have 4 young children and I would have to remove my 2 youngest from daycare in order to save money. We would also have to cut back on saving until we find a renter. We currently have under 15k saved. 

His thing is... this is an Investment and yes, it'll be hard right now.. But in the end it'll all pay off. He also says we may not get an opportunity like this again soon. Low interest rate, bigger property, 3 car garage, huge yard for kids to play.. basically our dream home. I am just having trouble seeing the light at the end of the tunnel. We have a very comfortable life now and I don't want to complicate things by putting too much on our plate. I don't see how it's a good investment if we have to cut back on saving, find side hustles, or even struggle for a little bit while we have vacancies. Yes, we have always wanted to invest in real estate, but this isn't how I wanted to go about it. He says he has it under control, we won't struggle, and we'll be fine. He is also getting a hefty raise soon, so he is taking that into account. I am still worried. He is very driven and determined to make this work. Backing out is not an option for him. He brought up the fact that we could transfer the rental into our business name or a trust to avoid paying property taxes. Does anyone have an idea on how that works?

Overall, what are your thoughts on this situation? We close in a little over a month. Are there ways that we could get around the property tax like he says? How was your experience with your first investment property? Should I just suck it up because this is just apart of the game? I am new to this and it's all very overwhelming. I am in dire need of some advice. We need someone that could properly guide us so that we can minimize these road blocks in our future. Thanks.

Hello Tichina,

First off, thank you for your service. Investing in real estate is a big decision, and it's understandable to have reservations, especially when unforeseen complications arise.

Property Tax Exemption: Unfortunately, many jurisdictions do have the stipulation that property tax exemptions, especially ones for veterans, only apply to primary residences. While transferring a property into a business name or trust can have some benefits, it typically doesn't absolve you from paying property taxes. Instead, the tax liability often transfers to the entity. Each jurisdiction may have its own nuances, so consulting with a local tax advisor or attorney is paramount.

Financial Strain: Real estate investments, especially when starting, can strain your finances. The unexpected cost of property taxes on your rental property complicates this. While your husband is right in that investing often requires taking on some risk, it's essential both of you are comfortable with the level of risk. Your concerns about childcare, potential vacancies, and unexpected costs are valid.

Potential Benefits: On the brighter side, the potential appreciation of both properties, the rental income from the first house, and the tax benefits associated with property depreciation and mortgage interest deductions might still make this a worthwhile endeavor. However, these benefits should be weighed against the costs and uncertainties.

Alternative Strategies: If the property tax on the rental is a deal-breaker, you might consider:

Selling the current home to capitalize on its equity, then using those funds to finance the new home and possibly another more affordable investment property later on.
Renting the new home instead and staying in the current one (though this isn't ideal given the emotional connection you've developed with the new home).

Communication is Key: The most crucial aspect is communication between you and your husband. Financial decisions, especially of this magnitude, should be collaborative. It's essential to find a balance between his drive and your reservations to ensure you're both on the same page.

Remember, investing in real estate is as much about the numbers as it is about timing. While there will always be another "perfect" property, ensuring you're financially and mentally prepared is critical. It's okay to step back and reassess if you both feel it's not the right time.

Best of luck with your decision and your journey into real estate!