All Forum Posts by: Anita Parsa

How could I use that exemption in the future?  We won’t live here again, and by the time my 2 yr lease to this tenant finishes, we won’t have lived in it 3 of 5 years?  I must be missing something but I’m not sure what it is.

My husband and I are dipping our toes into rental real estate by renting out the family home that we've been in for over 22 years.

We own the home outright.  With 22 years of appreciation, we would be just under the limit to exclude all capital gains if we were to sell right now instead of rent. 

We own the home free and clear.  We have a 2 year lease with our first tenant starting soon.  We have a property manager, a low maintenance seeming tenant, and a house that's in pretty good shape.  In the ideal scenario, we picture keeping the property as a cash flowing asset forever and letting our kids deal with it after we die.

BUT, if that doesn't happen, and we decide to sell in 7 years or 10 years, I'm going to kick myself for losing out on the capital gains tax exclusion of $500k.  

Today I had a chat with the attorney who is setting up our LLC and putting the house into the LLC, etc, about the pros and cons of selling the house to the LLC as a way of capturing that gain and also helping maximize my depreciation calcuation. I'd love to get input from experienced people here on this idea.

I searched for this situation in the forums and found several discussions of selling to an LLC but not on point with my situation. Please be gentle; I'm new at this and it's pretty complex :)

Structure / Legal Details

- we'd establish market value through a combination of comps from local real estate agent and an appraisal

- attorney would establish all required "arms length" aspects including a mortgage at a minimum standard federal rate

- LLC would pay us back based on a standard promissory note over 30 yrs

Pros of selling to the LLC (I think)

- A sale now would be the only time we'd be able to take advantage of the cap gains exclusion on this house bc we won't qualify for the "live there 3 of 5 years" rule due to the timing of our lease and our last time of residence.  We don't intend to move back into this house.  And  if we did a 1031 exchange later, I think I'm correct that having this cost basis established at today's market value vs 2001's cost + improvements would serve me better in the 1031.

- The depreciation amount for my rental house would be maximized bc would be set at the selling price / current market value vs 2001 cost basis + improvements.

Cons of selling to LLC 

- Ongoing legal & tax paperwork that is more complex & potentially more expensive than if we kept ownership outside LLC

- ?

Thank you for any comments, questions or personal experiences with this situation.

Anita

This makes me laugh so much!  You could prank newbies by fine-tuning this a bit and posting it response to their questions.  

Thank you for your response.  I can't tell you how much I appreciate experienced investors taking the time to respond.

After a scary list like that, I have to ask:  what scares YOU, Matt?  Sounds like you've been through it all and I would guess you know how to manage the majority of those things to your comfort or you wouldn't be doing it.  Which of those things would cause your brain to fire up with worry in the middle of the night? 

Thank you for this detailed and thoughtful response.  Your time is money and I truly appreciate your sharing your expertise.  

I read your linked post to the failed 15 unit story and it reminded me of another question I have that may be dumb...but hey, better to ask a dumb question than make a dumb purchase!

How do I know whether the properties I'm looking at are B or C?  (I'm fairly sure I'm not looking at any D or F). 

My backstory is that I initially started looking at A-/B+ SFH in my area but realized that I am not looking for appreciation but rather cash flow. So I started looking analyzing multi family properties. I'm not interested in flipping so what I've tried to do is look at an area that has low average SFH cost relative to rents (but is not a blighted/crime-filled etc.) area.

Anita

@Erik Hatch, 

I'm confused.  The property managers to whom I've spoken so far appear to charge a % fee based on gross income so that wouldn't be sensitive to # of doors.  

Also, 40 doors is small?  I'm thinking I'd start with a 4-6 door unit so that will be *really* small :)

Great question.  For my first purchase, I would probably start small so I can learn the ropes with less risk.  My goal is to be generating $4,000 a month cash flow in about 7 years.  

Using $100/door, that would mean I'd need about 40 doors.  I'd likely consolidate in one market area for the ease of management but diversity into several small / midsize properties to spread my risk a bit. 

That said, there is a 20 unit property right now in my target area that is $1,100,000.  It gets me in the game in a big way in a hurry, but I don't know enough to jump in that big out of the gate.

Thanks, this is exactly the type of information I was hoping to get.  I appreciate your taking the time to help me.

Anita
 

In my situation, we have substantial assets because we are nearing retirement. The impetus for REI is to supplement retirement income.

What's the universe of personal risk in a default / foreclosure situation?  Is it limited to the size of the mortgage or is there a way it could be bigger?  

I'm actively searching for my first multi-family property which I plan to have professionally managed.  

The market I'm shopping is solid (not hot, but solid) with good rent prices relative to purchase price with good cash flow opportunity.  

I tend to use extremely conservative numbers in my analysis so I'm prepared for higher than average vacancy, maintenance costs, etc.  If my selected property cash flows with those conservative numbers, the deal is probably okay.  

What I'm trying to wrap my head around is what the bigger risks are and how to protect against them.   

Lawsuits - good management company + umbrella liability

High Vacancy - conservative assumptions in original analysis + cash reserves

What other risks should I be cognizant of?  In the event of a serious economic downturn I could face inability to sell the property / foreclosure.  

Obviously I don't really want to be scared out of a investing in real estate...I just want to be sure I know what the risks are so I can mitigate them.