LLC vs Umbrella Insurance vs Other Options

[John Campbell]

New to renting, looking for advice.

Single family home valued around $1.1m. Roughly $510k owed. Converting it to a rental projected to rent @ $4500 monthly. Currently monthly is $2800 monthly on a 2.65%. Property Manager assigned.

Moving out of state, not willing to sell the property right now.

In addition to renters insurance and landlord insurance, which direction should I go as far as protecting myself? Factoring in filing taxes, maintaining LLCs, and overall cost vs security, I’m hearing many different options. 

Current net worth is only $1million with retirement accounts included. New primary will be in Idaho. 

Any suggestions on how I should structure this?

Thanks!

[Bill B.]

You can sell your primary home tax free (called section 121) on the first $500k of gains. If you turn your primary home in to a rental, that exemption goes away. Then you’re looking at a minimum of 15% federal tax and 10% California tax on that $500k. So you’ll owe at least $125k in income tax if you sell the property after it becomes a rental but before you die. 

People will mention you can make it a rental for a short period and then still sell but… Why do that? If you miss that deadline (because of a failed sale or a tenant that won’t move out.) it’s all taxable, if you move back in to it as your primary it’s only a pro-rated tax free gain when you eventually sell. As mentioned you are cash flow negative when you consider the additional interest on your new primary, so it’s a lose, lose situation selling later.