All Forum Posts by: Account Closed

Hey people- It has been a long while since I last surfed around here on BP site. I would like to ask the entire BP community about your advice/suggestion/feedback based on your real estate/tax expertise in a dilemma of exit strategy my business partner and I will have to deal with our properties. Back in a couple of years ago, we bought a 2,100 sq ft resident property with an adjacent empty land in same size for $400k. We are now working with a developer and architects to construct a two units building with a rooftop on that land. They said it would cost about $500-$600k to construct and based on our analysis via sales comps around the area with similar characteristics, it will immediately have a valuation of $1.3m at conservative number ($600k for the lower unit and $700k for the upper unit). The existing property appears to be currently valued at mid-$500k range. We are trying to figure if we should sell the existing property we have now, using our respective 250k capital gain exclusion option so we won't pay any cent on capital gain taxes to the government as we have lived on the property for at least two years. Or if we should sell the newly constructed lower unit then use the whole proceeds to pay off all the construction loan, meaning there will be no mortgage on the upper unit. Then whatever the remaining proceeds, if any, will be then taxed at our ordinary rates. We did discuss about the possibility of using 1031 exchange on the lower unit to defer taxes and purchase other investment properties that generate higher COC % than if we choose to keep and rent it. Other possibility is to rent the lower unit just for one year then sell to qualify for the 15% long term capital gain taxes instead of having to pay at our ordinary rates if we decide to sell immediately within less a year after the construction is completed. We intend on moving from our existing property to the upper unit and live there for at least 2 years. We plan to have our existing property converted into a rental investment property and hold it as long as possible. It has excellent loan terms so we do not want to lose it. So, all in sum, the simple question here for all of you here in BP community is: What exactly would you do if you were in my shoes with the situation I just explained? I am trying to figure out what the best approach should be taken in this case that favors in building wealth in real estate. Thoughts or have questions to ask for further clarification? Feel free to chime in! Looking forward to your responses and they are usually pretty good here in BP. Very impressive. Thanks for reading. Best, Arthur

I'm currently looking for wholesalers to connect from Indianapolis, Kansas City, and Baltimore. Please send me a private message if you are a wholesaler or know anyone who is a wholesaler in any of those cities. I'd appreciate your help.

Thanks,
Arthur

Originally posted by @Wayne Brooks:

The rule is, you must live in it for at least two years, And 3 of the last five years.  I do not know how renting out a portion, while still living there affects this.

Perhaps @Steven Hamilton II can help out.

 Thanks Wayne. I'll wait and see if Steven can chime in.

Hi All-

I have a question about 121 exclusion rule. I understand I must own and live in my property for at least 2 out of the 5 years. My friend and I bought a house together as in tenants-in-common ownership in 2011. We have owned and lived in it for the first two years then we have decided to bring in 4 tenants to live with us in the 3rd year while collecting their monthly rents. We intend to keep them for another year (4th year). 

So, now the question is, how does this impact us with the 121 exclusion rule? I thought that we would qualify for the full capital gain exclusion of $250k at maximum each for me and my friend since we have already owned and lived in it for at least two years. However, my friend told me that we would not be eligible for the full capital gain exclusion because we are renting to 4 tenants in the 3rd year. Is this true? 

Let's say we have generated a total of $240k capital gain on the property. It is being split by two of us so that's $120k capital gain each we could claim for capital gain exclusion. However, my friend mentioned that since we are renting to tenants in the 3rd year and will again in 4th year, then our individual capital gain exclusion will not be at full $120k each and will be reduced because of that, say at end of 4th year.

Can anyone please help answer this question? I'd appreciate it!

Thanks,
Arthur

@Howard Manning 

Capitalization Rate = Yearly Income/Total Value

For example, if Stephane buys a property that will generate $125,000 per year and he pays $900,000 for it, the cap rate is: 125,000/900,000 = 13.89%.

But it gets a little more complicated. What if the property's value rises to $2 million two years later? Now the cap rate is a less favorable 125,000/2 million = 6.25%. This is because Stephane could potentially sell the property for $2 million and use that money for an alternative investment.

From http://www.investopedia.com/terms/c/capitalizationrate.asp

@Justin B. 

I'd be interested in this as well. I live in Washington DC. I'm pretty new to the real estate investing but I really wanted to get started somewhere. Not sure if you are looking for seasoned REIs or you are also open to newbies like me? 

Elizabeth Colegrove Then I haven't gotten to that point yet! Thanks a bunch!

Elizabeth Colegrove Matt Devincenzo Gotcha. I've not yet bought my first investment property so excuse me for my ignorance... The reserves requirement qualification is usually applied for investment properties only, correct? I'm asking because I don't think I was ever asked about my reserves when I bought my primary residence property.

David Holland Awesome. Glad you got it worked out and bought one in Baltimore. I am also considering an investment property in Baltimore but I've had a difficult time finding a distressed multi family home to rehab and take an advantage of the additional equity between the total cost and after repairs value. Is yours multi family home or single?