All Forum Posts by: Ben Raygor

Seems like a pretty good problem to have.  

My general outlook is that I'd probably be slower to sell House 1 since it is cash flowing nicely at $750 (and you're saying that is conservative!) when you are only $135,000 into the house.  I don't know how many hours of work you put into the place yourself, but your $115,000 gain at sale would basically be your pay for all your sweat, skill and time.  

If the property cash flowed $800/month, it would take about 12 years for you to cash flow $115,000 from House 1, and all you have to do is be a landlord (not saying it is easy, but probably much less time involved than what you put into the house to get it to this point).  In 12 years the market value of the house COULD be the same as right now.  In that case, you'd be raking in over $200,000.  The market could be much lower too.  The majority of market experts are telling us that we are in a high market currently.  So if you hold, you'd most likely be waiting out another cycle when the market works its way down and then back up. 

How long will it take for House 1 to be "seasoned" with tenants?  Some institutions need 6 months, some need 12 months or more.  If you can be cash strapped for a short amount of time, I'd lean that direction.  If you need to be cash strapped for much longer and you really think you will miss out on some fantastic buys that will ultimately cash flow or appreciate better than House 1, then I could see you selling House 1.  

It sounds like you've done awesome with House 1 and I'd understand if you really don't want to miss an opportunity to sell in a high market.  I just think that you have fantastic cash flow, according to your numbers, and would be hesitant to sell it right now.  If you do choose to sell it, hopefully you can identify the next investment property soon and 1031 exchange it to save a lot of money in taxes.  

@Gwen St. Pierre, you sound like you want to sell the property and no longer manage it due to being 4 hours away.  IF you wanted to consider holding onto it as a rental longer, there is a way you can take advantage of the 121 exclusion and still hold onto the property as a rental.  You could create a Corporation (S or C) and sell it to that entity for the fair market value ($165,000 perhaps).  As an individual, you will report the sale on your personal tax return and take advantage of the 121 exclusion.  The Corporation will have a stepped up basis in the property of $165,000 and will depreciate based off of that.  

This is a strategy that is generally used for higher dollar transactions with higher capital gains.  It costs money and takes time to setup a Corporation.  The strategy is an option depending on your cash and financing options too at the time, so it might not even be feasible right now.  But it is definitely something to keep in mind for future primary residences that may result in larger capital gains but would still make good rental properties.   

Like Steve said, "the 121 exclusion can be prorated" - this is probably true depending on your move.  If you move for work purposes and your new place of employment is at least 50 miles farther from the residence sold than the former place of employment was, it will count as a reduced exclusion.  In that case, your maximum exclusion amount ($250,000 or $500,000) would be prorated for the 21/24 months.  In that case, it would be more than enough to exclude your capital gains, apart from your $21,000 depreciation recapture.  In most cases, I would say that the taxes you would owe on a $21,000 recapture would not justify the time and stress involved in a 1031 exchange, especially if you don't have another property picked out already.  

Welcome!  The conversations I have had with random investors I've run into, and investors I've known, have been incredible BECAUSE of all the exposure and knowledge I have received from Bigger Pockets.  Hoping it does the same for you.  

Jeffrey, sheltering against self-employed income is huge!  Good plan.  Whoever you end up partnering with, make sure you find out: 

1) The value of an S-Corporation.  This can allow you to divide your income earned between wages (subject to SE tax) and dividends (not subject to SE tax).  Depending on the amount of commission income you receive, this may be the first step to take that causes the highest impact on your tax return.  

2) How a SEP IRA plan may help you out. The details of how a SEP IRA plan will impact your taxes depends on whether or not you file as self-employed (Schedule C) or as an S-Corporation as well as whether or not you have any employees on your team.

3) How to keep good records.  Keeping track of ALL your expenses is going to be HUGE.  Not keeping good records is probably the #1 stupid silly way that investors, business owners, realtors, etc. pay more in self-employment taxes than they need to.  Meals and travel costs are commonly overlooked in record keeping.  CPAs should be asking you about your bookkeeping needs - what do you do yourself/what would you like to outsource?  Here is a quick read that might help you gauge what stage you are in.  

https://www.therealestatecpa.com/2017/01/13/guide-...

Here's an article loaded with good questions for you to ask potential CPA partners

https://www.biggerpockets.com/renewsblog/2015/03/0...

I'm a CPA myself, so I would rather let other investors answer your question "Anyone know someone good?"  

If you used the property as your primary residence for 2 or more years and those two years are within the last 5 years, then you may qualify for the capital gains (Section 121) exclusion.  So that should be your first question to answer.  

However, the gain that can be excluded is reduced by the amount of depreciation you took on it during its time as an investment property.  If you reported $15,000 in depreciation, then your capital gain exclusion might only be $39,000 (64,000-15,000).  You will need to pay depreciation recapture tax on that $15,000.  

But like Thomas said above, it's impossible to know your capital gain without knowing your cost basis for the property.  Did you make any improvements to the property that would increase your basis above the $655,000 loan amount?  I'm assuming your original loan amount was at least a little bit higher than $655,000.  When did you purchase the property and when did you move out of it and make it an investment property?  What is your overall income going to look like for 2017?  You may not want to answer that last one here, but it's necessary if you want to figure out your tax bracket.  These are all questions that often need to be answered in order for somebody to render advice on your situation.  

Congratulations on the offer! 

I'm not a handy guy, but when rehabbing my home last year, scraping the old popcorn off was the easiest task on the list.  I think a $50/room quote just to scrape ceilings seems reasonable and not seriously risky if there aren't any high ceilings and every room isn't huge.  Many people could scrape a small bedroom in less than 30 minutes.  Just make sure they are using a mist sprayer instead of a jet stream from a hose, and make sure it's clear on who is cleaning up their mess.  

People, usually, don't seem to think hard about closing costs before the purchase of a property, unless they are flipping it.  If the property is going to cash-flow well enough as a rental property, most people just plan on holding onto it until it appreciates enough to result in a nice long-term capital gain at the sale, if that is their strategy.  In that case, the taxable gain will be reduced by the amount of closing costs that you need to pay.  

When properties are sold at a loss, closing costs that need to be paid could "wipe out your income/profit", sure.  But if the property cash flows for you, why would you sell it at a loss at all?  You would want to hold onto it and wait for a better market to sell it in UNLESS 1) selling it will relieve you of a massive headache and is worth the loss in cash, 2) selling it will allow you to invest funds in a bigger and better deal (happy scenario) or 3) some life circumstance happens and you just need cash bad, for medical or a home emergency (sad scenario) - people are selling stuff at a loss everyday because they really need/want the cash for something else.  

You are making a conservative calculation by not assuming that any appreciation will happen.  If you purchase a property at $84,000, rent it out for 10 years, sell it for $84,000 plus pay $8,400 in closing costs, and if those closing costs exceed your rental profit totals for 10 years, then it would probably be considered a foolish investment.  All that work just to have less cash in your pocket in the end...people typically wager that their rental profits will exceed the difference between their purchase price and their sale price (after paying any closing costs).  

10 years might be the problem with your calculation.  You, generally, wouldn't go through all the work of acquiring a rental property and being a landlord just to turn around and sell it the next year without some serious appreciation happening.  Just like 1 year, 10 years might be too short of a game plan for a rental with no appreciation assumed.