All Forum Posts by: John Hunter

I am considering buying a property to use a short term rental (likely in Dallas, Amarillo or San Antonio areas - for airbnb, vrbo, vacation rentals etc.).  I would like to find someone to take care of all of the aspects of managing the rental.  Please contact me if you do that or have a recommendation for someone.

If it goes well I may well expand. I have experience managing long term rentals myself mainly (and some using property managers) but I want to be out of the day to day management of the short term rentals.

There is a website with info on the group, I am not sure if posting the link is ok, so just search for:

  Amarillo REIG

There are quarterly talks and monthly gatherings.

Thanks, I think I understand that "mortgage boot" part now.  Confusing name it seems to me.  I guess that shouldn't be very surprising; the general idea of 1031 is fairly simple but the details sure can get complicated.

Thanks for your reply. It seems my focus on cash though is missing the "mortgage boot." 

So in my 2nd example, where on a cash basis you only "take out" $100,000 ($350,000 cleared on the sale less $250,000 down on the new place) and on a cash basis can you can just take $100,000 capital gain and $250,000 reduces the basis of the new place.  

But I am not clear on the "mortgage boot" - if you sell a place with a $400,000 mortgage and buy with a $250,000 mortgage does that mean you have a $150,000 mortgage boot?  Since it is called a "mortgage boot" am I correct in thinking it only has to do with the mortgage and not the cost of the new place (in my example the first place cleared $750,000 and the 2nd place only cost $400,000 which is a $350,000 difference).

Here is an example

  net sales price      $750,000

  adjusted basis      $450,000  (which has been reduced by $50,000 in depreciation)

  mortgage              $400,000

That gives a gain of $300,000 (made up of $250,000 in cap gains and $50,000 in depreciation recapture)

  and cash of $350,000

With no 1031 attempt the tax situation would be

capital gain of $250,000 and $50,000 in recaptured depreciation (ordinary income)

With this 1031 example would it then be

New property

  full cost               $400,000

  cash down         $100,000 

  mortgage           $300,000

  capital gains of $250,000

    because you are talking $250,000 "out" ($350,000 in cash less $100,000 in cash down on the new place) you have to treat that cash you get as taxable profit first and only after than has been used up then as return of basis.  The $50,000 of depreciation on the old house would roll into the new one (leaving a basis of $350,000).

But if the 

New property was

full cost $400,000

cash down $250,000  with a $150,000 mortgage

you are now just taking $100,000 out ($350,000 less $250,000 down on the new place) and so could reduce the gains to 

  capital gain of $100,000 

  with the new place having the basis reduced by $200,000 ($150,000 capital gain and $50,000 depreciation) leaving a $200,000 cost basis.

Is it that you essentially have to pay tax on whatever you take out (until you have taken out your entire profit plus depreciation)?

> What are you doing to stay diversified,

As you say - diversification with real estate and financial assets 

• within financial assets: stocks and bonds (though at these rates I prefer money market fund) and further within financial assets some global stocks (though there are reasonable arguments to be made for USA S&P 500 having lots of international exposure).

• also within real estate diversify - I am looking at a 2nd location in a different sate (I am uncomfortable with how much of my assets are in real estate in 1 geographic location). There are many good reasons to buy real estate locally - expertise in the market, ease of management... But from a perspective of diversification buying in a 2nd location can make sense (and then a 3rd...). You can also look at things like vacation rental (v. SFH rental, apartments, cheap v. expensive rentals...), business real estate (retail, office space...). You can use REITs (useful for example for those not interested or able to do business real estate directly). There are many risks to being geographically and type concentrated.
  • An easy way to see the risk is if say you owned all airbnb vacation rentals in 1 city and the city passed laws that restrict or kill your business?  The legal risk - local and state and federal tax law changes are real (and not just airbnb restriction law changes though that airbnb example is easy for most people to see).  Also the economy of that location or state could be harmed and you would be harmed (even if you did really well in a downward spiraling market the market forces may overwhelm you advantages).

Diversification is definitely a wise move to be safe.  But how you do that is debatable and not as easy as just wishing to be wisely diversified.  Most people not on these boards would benefit from diversification by adding real estate to their investments (while many on these board probably could benefit by diversification with non-real-estate investments).

Warren Buffett's argument against too much diversification basically boils down to him wanting to spend a lot of time becoming an expert on 10 companies he owns vs. buying some of 200 companies (as he doesn't think anyone can really be an expert on 200).  His statements on diversification in this manner was essentially a response to questions about comparing him to stock pickers from managed mutual funds (where they owned 100 or 200 or more stocks and he often owned huge amounts of under 10 - he also bought out companies completely so really he has over 10 but...).

Warren Buffett also believes just buying very diversified stock market funds (unmanaged with low costs) is a very good strategy for nearly everyone (excepting himself and a few others).  Basically Warren Buffett says diversification is a good way to get average returns (if you can smartly beat the market over the long term diversification will dilute your ability to beat the market moving you to average).  But for the vast majority of investors over the long term the reduced risk that comes with diversification is wise and pays off for them.

Where can I read about interest deductions on "cash out refinance" or HELOC on a rental?

Basically I am trying to learn about this situation:

Say I bought a place for $200,000 and borrowed $140,000 and have paid that down to $100,000 now (and the place is worth over $400,000 now). I am a bit confused about what interest payments would be deductible if I borrowed more?  Does depreciation affect it in any way (lets say in this example $50,000 in depreciation had already been taken).

Can I just borrow whatever amount someone will lend and deduct the interest?  So I could borrow/refinance say $200,000 more (bringing the outstanding mortgage to $300,000)?  Or is there some limit related to the original purchase price (or that price minus depreciation? - so $150,000)?

Is the situation different it I borrow an extra $40,000 to pay for upgrades/repairs (refinishing floor, repainting whole house, new fridge...) to the house?  Or what if I paid for upgrades out of my own cash but now want to reimburse myself (to increase my cash buffer)?

I have tried finding these details but have found it a bit difficult to find something definitive on how the rules work.