Am i renting my home out at a loss? Depreciation confusion....

[Brian Udovich]

My wife and I "fell" into renting out our prior residence after we bought/moved to another home and a neighbor asked if we were interested in renting out or old one. We've since had the same “great” tenant for over 3yrs...

Can someone evaluate my situation, or recommend a consultant to do so? I fear that I’m throwing money away…particularly considering future Depreciation Recapture.

Purchased for $165,000 9/2007. We lived there as our residence until 12/2013. I believe value currently at $190,000

Refinanced $126,000 @ 5.25% 8/2010 (23yrs remain)

Currently owe: $111,000

Total Monthly Payment: 1228.17

     Monthly property Tax: $531.59

     Mortgage Payment: $696.58

Annual Property Insurance: $617

Currently also have $30,000 in Home Equity Line of Credit @ 4.25% (will need to be converted to a regular Home Equity Loan soon: estimating $30,000 @ 5.15% for 20yrs and $200/mo

Began renting it out 8/2014 for $1250/mo

My accountant is depreciating the Structure value of $140,000 ($5090/yr)

I’m also depreciating the estimated value of the appliances and carpet at the time at a shorter term (5yrs). Can’t recall the exact values but fairly insignificant…$1500 appliances and carpet?

I’m also depreciating a newly purchased commercial mower ($6000) and an enclosed trailer ($5000) to store and transport it and other equipment to the property over 5yrs (I think) or $2200/yr. I maintain the property weekly but have not begun keeping track of fuel or travel expenses.

Our tax refunds have been great so it feels like, even though no real monthly cashflow, the huge return plus the increased equity (not to mention my “free” storage use of the property and garage) makes this seem like it’s working. However, I’d really like to be able to quantify the real situation…particularly considering future depreciation recapture. I was hoping to evaluate a “sell now” and Sell in 3, 5, 10, 20 years.

I’ve tried a couple Depreciation Recapture calculators but unsure what values to use since we lived there for a while. Also, Does Depreciation Recapture also include the appliances, mower and trailer?

This could lead to  an expansion or exit to this fascinating field of rental property!  

[Greg Scott]

Brian:

Yeah, $25/month of net cash flow doesn't consider long-term repairs, like when the A/C needs to be replaced, and all of a sudden 160 months of cash flow are gone.  I'm surprised, however, your rents haven't risen since then.

From a depreciation perspective, accelerating your depreciation isn't helping you unless you can claim real estate professional status.  (If you were, your depreciation would offset some of your non-passive income).  So having the appliances and equipment on a different schedule really does nothing.

In the example above, your income is $25/mo or $300 per year.   So your depreciation wipes out the $300.  The remaining unused depreciation gets put into an account you can use later to offset gains.  I wouldn't worry too much about depreciation recapture because at $300/yr, you have a whopping $900 in equity recapture that will get added to your profit when you sell.

Hope that helps.