Is renting a place out worth it considering the Depreciation Recapture Tax?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Assuming you either have an AGI of over $150K OR you do not manage the rental property yourself, you cannot deduct rental losses from ordinary income, so what you need to do is
- compare the income you bring every year after all the expenses and taxes from the rental with your capital gains rate *((price of your house + cost of improvements made)/27.5years)

If you both have AGI of under $150K and manage your rental yourself, you can deduct losses from the rental (including depreciation) from your ordinary income, so you don't stand to lose anything.

Ok, I assume you do know what you're talking about

Those losses (including depreciation) from renting - "passive loss" cannot be used to offset ordinary income, but it should be accumulated, right?
Now, question is - can you offset income from sales of the rental property (capital gain?) by accumulated losses from rental activity?

Wrong. Losses from renting can be used to offset ordinary income if you both manage your rental yourself and have AGI of less than $150K.

Exception for Rental Real Estate With Active Participation

If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

http://www.irs.gov/publications/p527/ch03.html#en_US_2012_publink1000219121
I am not aware of any kind of "accumulation" of such losses.

Thanks for the link. I would like to hear your interpretation of Pub 925 quote:

Dispositions
Any passive activity losses (but not credits) that have not been allowed (including current year losses) generally are allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction
in which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to you [\quote]
http://www.irs.gov/pub/irs-pdf/p925.pdf

[Anonymous]

PP here - just a side note - I do know about 150K AGI rules, but didn't mentioned it, because it's given that OP in DC buying second property and keeping current one most likely has AGI over 150K

[Anonymous]

Anonymous wrote:
Thanks for the link. I would like to hear your interpretation of Pub 925 quote:

Dispositions
Any passive activity losses (but not credits) that have not been allowed (including current year losses) generally are allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction
in which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to you [\quote]
http://www.irs.gov/pub/irs-pdf/p925.pdf

It sounds like passive losses can be accrued and used to offset a gain in the year you sell your passive activity property in an arms-length transaction. It agrees with http://www.irs.gov/taxtopics/tc425.html, which says that

Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity. In contrast, you may not claim unused passive activity credits upon disposition of your entire interest in the activity. However, you may elect to increase the basis of the credit property in an amount equal to the portion of the unused credit that previously reduced the basis of the credit property.

No clue what "passive activity credit" is though.

[Anonymous]

Anonymous wrote:PP here - just a side note - I do know about 150K AGI rules, but didn't mentioned it, because it's given that OP in DC buying second property and keeping current one most likely has AGI over 150K

I did just that - buy a second property and keep the first - with an AGI of under $100K.

[Anonymous]

Anonymous wrote:

Anonymous wrote:PP here - just a side note - I do know about 150K AGI rules, but didn't mentioned it, because it's given that OP in DC buying second property and keeping current one most likely has AGI over 150K

I did just that - buy a second property and keep the first - with an AGI of under $100K.

In this area?? Where? I'm curious

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:PP here - just a side note - I do know about 150K AGI rules, but didn't mentioned it, because it's given that OP in DC buying second property and keeping current one most likely has AGI over 150K

I did just that - buy a second property and keep the first - with an AGI of under $100K.

In this area?? Where? I'm curious

N. Bethesda.

[Anonymous]

In my experience, it was worth it.

In 2012, I sold my house which I partially rented out (rented 2 BRs to roommates, I lived in the 3rd BR). So tax wise, I had a partial rental, deducted partial expenses, etc. I owned the house from 2001-2012.

One of the PPs is correct that you have to take the depreciation recapture (or whatever it's called) when you sell even if you didn't take depreciation in prior years, so you might as well take depreciation from day 1. I worked with a CPA when I first got the house to make sure I was doing it right, and from then on, I could do my taxes on Turbo Tax (with some notes I made for myself and looked at each year). I also consulted with the CPA just before I sold and again after I sold when I did my 2012 taxes. Those consults were invaluable, and I highly recommend you check with a CPA to run some numbers before you consider renting out a property.

My numbers were:
I was in the house 11 years.
The whole time I had a mortgage of about $2000 monthly and I took in about $1400-$1500 monthly in rental income.
I believe the depreciation amount I could deduct each year was around $5000, or in that neighborhood.
Because I put significant improvements into the home each year, I usually had a "loss" on paper vs. the rental income, and each year, I got nice refunds (around 3-5K).

Original purchase price was $276K. Sold price in 2012 was $515K.

When all was said and done on my 2012 taxes, I only owed about $5K for state and federal combined. Given all the depreciation I took and the gains from the sale, I think that was a pretty good deal. One other thing that was very helpful was when I met with the CPA just before I sold, she gave me a conservative estimate for how much I should keep from the sale to hold back for taxes. She actually overestimated that amount, so instead of 20K, it was around 5K.

[Anonymous]

Anonymous wrote:

Anonymous wrote:PP here - just a side note - I do know about 150K AGI rules, but didn't mentioned it, because it's given that OP in DC buying second property and keeping current one most likely has AGI over 150K

I did just that - buy a second property and keep the first - with an AGI of under $100K.

We did, too. We moved out of NoVa and rented out our property (bought back in 2000). We bought a second property out of the area for a bit over $500K. Our AGI is under $150. Heck our gross is under $150K. This was the first year we rented it out. We actively managed the property and were able to depreciation the house this year. When we sell - most likely this year - I understand we will have to do the depreciation recapture. We will have lived in the house for 2 of the past 5 years when we sell, most likely this year.

[Anonymous]

If its been your primary residence, make sure you don't rent it for more than 2 years. You don't want to lose the $250,000 per person capital gains exclusion. That would be a big deal.

[Anonymous]

Anonymous wrote:Well, that explains it. Bought on the hill in 1996. Two units, blocks from the Capitol, paid $141K. Paid off the mortgage. Rents for about $4K now.

It's worth it.

Ditto, bought two homes in Bethesda, 92 and 99, totally worth it, paid off also, great income!

[Anonymous]

Anonymous wrote:If its been your primary residence, make sure you don't rent it for more than 2 years. You don't want to lose the $250,000 per person capital gains exclusion. That would be a big deal.

More than 3. If you have lived in it for 2 of the last five you are OK.

[Anonymous]

OP here... we do not make over $150,000. We bought very low, and saved a lot in the meanwhile.
I think I've sorted this out enough to say that it's the capital gains tax that hits hard, not the depreciation recapture tax upon sale.
Thanks for the discussion. We are talking this over tomorrow with a financial person. I'll post what we learn, if anyone is interested.