All Forum Posts by: Delin W.

Considering purchase of a PUD unit (townhome, not condo-tel) in a resort area and would like some advice about what the exact rules are governing second home and investment property loans.

We intend to use the property ourselves as much as possible (8 long weekends per year, plus a few weeks when we can), but plan to rent it via VRBO when we are not there. I will manage the rentals and not use a management company.

We will claim the rental income to the IRS, but do not expect it to be much; we may or may not break even. 

Can anyone point me to the exact language Fannie and Freddie use when defining owner types and loan types? None of the loan officers can point to the exact language. They basically tell me I can do either loan, but getting an investment loan would be the safe route. I agree, but darnit, I would not buy this property if I did not intend to use it myself as a second home! Any advice out there?

TIA

Okay, okay. I hear you. I will get it, but I'm not going to pretend to be happy about it! I can't shake the feeling that this is bit of a racket, especially given a) the infrequent issues and b) the low, low cost of fixing the majority of problems. I shall grumble grumble grumble at the closing and sign and pay anyway.

Thanks for the advice. : )

Thanks for that explanation. Why is there double coverage, though? If there is a problem with the title within the first months of ownership, and using your 200k example, would the title company really pay me 200k and also pay the lender 150k? I thought the Owner's Policy covered only the owner's investment, and I suppose I thought the equity balance would slide between the lender and the owner, as the mortgage is paid down.

I am purchasing a condo in a complex where I already own one. The seller is losing money on the deal and is not willing to pay for anything, including the $2,000 "Owner's Policy" from the title company. This is generally paid for by the Seller, but it now falls to me.

I am planning on purchasing the "Lender's Policy", which is required here, and normally paid for by the buyer. It runs about $1,500 and my understanding is that it insures the lender's portion, ie 75% of the purchase price.

So I'm trying to figure out if the "Owner's Policy" is worth the $2,000 price tag. I thought the Owner's Policy only covered the buyer's portion of the home, ie 25%, so I am confused as to why it is more expensive.

I also don't understand why there are two separate policies, presumably when there is only one title search performed. What is driving the cost?

And why didn't my title company tell me that the Owner's Policy was optional? They had a hard time admitting this, and finally came up with a waiver that I will need to sign if I chose to decline the Owner's Policy. This title company is a reputable one, and they appear to be simply pushing the industry standard -- ie promoting fear -- when it comes to the Owner's Policy.

BTW, nothing came up on my other condo's title search, so there doesn't appear to be any historic issues with land ownership. The seller bought directly from the developer, so I think the only risk is a potential title issue related to him. If that is the case, wouldn't/shouldn't the title company find that while doing the search for the Lender's Policy?

Can anyone shed any light on this situation?

Thanks in advance!!

Charles:

Thank you for that post. You have cleared a few things up for me. The fact that some of the CPAs in non-community-property states are having no issues is likely due to the fact that, as you say, no monies would be gained by correcting the error. Aha! That makes perfect sense.

And about the 401k, that makes sense also... if I have cash from the rentals in the bank, yet I claim a loss due to mortgage interest, depreciation and operating expenses, there is no room for earned income / 401k even though my cash position is positive.

(You can probably see the division of tasks in the household by my posts... I run day-to-day and husband handles the yearly stuff!)

Thank you for commenting.

From what I am reading, you are both right. (!!)

For the state (which is who you set up an LLC with), you can be either a single- or multiple-member LLC. In community-property states (I am not in one), a multi-member husband/wife LLC is treated by the IRS as a "sole proprietor" entity, ie a single taxpayer. This means that your rental income goes against one member's regular income and you don't need to prepare any other returns. Nice; wish I were in one of these states.

For the rest of us, it appears the regulations are unclear and how to file taxes are a matter of healthy disagreement in CPA forums.

Many CPA posters treat H/W rental teams as a "sole proprietor" to the IRS, as above, even in non-community-property states, and they are not reporting any issues. I am trying to figure out if it's worth it to try...

Others says that is technically incorrect and that two+ members make it a partnership and you must file the 1065/K-1s.

Still others say you are indeed a partnership, but with regard to rentals, you can elect to be taxed as a Qualified Joint Venture, which essentially moves you back to the "sole proprietor" categories. (At least that 's my understanding.)

ANYWAY, I am going to assume for the moment that either avenue ought to work (I really don't want to get bogged down in the deep technicalities here) and it depends on how your CPA wants to proceed.

I'm looking for any practical advice about how to shelter profits and avoid a big hit on income tax.

PS For example, husband currently maxes out 401k... would an LLC in wife's name be an opportunity to create/contribute to another 401k?

Just thought I'd run this by everyone:

Husband has a day-job and wife manages the rental properties but does not draw a W2.

In setting up the LLCs, are there any pros/cons to setting things up in one name or the other? We file taxes jointly, so all profits go against hubby's income, no matter whose name is on the LLC.

Are there any other considerations before I pull the trigger?

Thanks!

Yes, thanks for the replies and clarifications. I have decided against creating the LLC for property management. It just doesn't offer any real protection against personal liability, as you all point out. I think that's the only place there is a potential vulnerability for us, but all investments come with some degree of risk I suppose.
Thanks for all of your thoughtful advice. : )

Our research is parallel. I have also been impressed with Clint and had sent him an email not 20 minutes before I posted. Nice to know my impressions are validated by at least one other. : )