Sell my house now or keep leasing it out at a loss?

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<p>Trock,</p>

<p>As you have mentioned, your property was purchase back in 2002? Capital gain tax doesn't apply to you. </p>
 
Geez, first dissimating the wrong information on comps. Now advising on capital gain tax without an inkling of knowledge. This blog is just great. So long.
 
I am going to look more closely at my true losses as I am actually losing about $200 per month if I factor in the principal I am paying and the interest savings. I'll discuss it more with my accountant.





Zovall,





I guess I was seeing the rental property as a "home," something that I can pass on to my kids, but I am realizing that I should view it less emotionally, and rather as a pure investment/stock/401K/cash. I'm leaning more now to just selling it fast. I'll let everyone here on this blog know what the exact property and price is if I decide to let it rip...and for those of you who have to buy now, it will be priced "right" for the month and year it goes on sale! (read that last part again <em>carefully</em>)
 
reason,





I thought that I have to live in a house for two out of five years to avoid capital gains? How does buying it in 2002 help me avoid it?
 
<p>Here let me help <a href="http://www.irs.gov/publications/p544/ch03.html">http://www.irs.gov/publications/p544/ch03.html</a> </p>

<p>Please let me know how to avoid capital gains taxes especially in 2008.</p>

<p>TRock - The hardest thing to do with any investment is to remove emotion. When I figure out how to perfect this I will let you know. If you figure it out first please let me know. If you do list your property it would be very interesting to have a first hand look from a seller's perspective. Like I said before I wish you the best of luck and the most profit in whatever decision you make. So please keep us updated on what you do.</p>
 
Long term capital gains tax would be incured on the sale of the real property as TRock has described his situation and tax would also be incurred on the allowable recaptured depreciation. TRock - Please understand the difference between allowable and claimed before making any decision, and if you have any questions on this subject, please ask. As described, the property has never been occupied by TRock as his primary residence, therefore the capital gains exemption on a primary residence does not apply. Depending on his current income and the gains from the property, the gains could neccessitate the payment of AMT for the tax year in which the property is sold, if TRock is not in an AMT situation already. TRock - Do you have any tax questions which would help you make your decision? I am more than happy to answer generic type questions. For exact monetary amounts, please see my answer to BethN.
 
<p>BethN,</p>

<p>To <em>consider and research my options, could someone with MLS access please check the particulars (DOM, etc.) for MLS #S402228? This property is a very close comparable to mine. Thanx a bunch.</em></p>

<p>There are 7 Res Income properties on the market for zip 92868.</p>

<p>According to the MLS --3621 W Park Balboa is in pending sale after 280 DOM (felt out of escrow once). 2,925 sq. ft., asking price $820K. Market rent $4,000/month. Cap rate 3.5%.</p>

<p>3447 W Park Balboa is still active (MLS#S402228), DOM 700 (never in escrow). 3,164 sq. ft, asking price $895K. Market rent $4,000/month. Cap rate 2.7%.</p>

<p>3621 W Park Balboa Closed Escrow on 2/27/07, 2925 sq. ft., Sold for $800K. Cap rate 3.5%</p>

<p>Without knowing the condition of the property and being having no bidder for the last 2 years, I am guessing the market price for 3447 W Park is in the very low $800K.</p>
 
<p>nice idea here... </p>

<p>minimize your cash out put, minimize your depreciating assets....</p>

<p>rule number one - keep what you have.... (*or as the 1st rule of acquisition says.... "Once you have their money, never give it back".</p>

<p>-bix</p>
 
Awgee....since you are an accountant, or so I thought I read, I pose this question to you:





Couldn't T-Rock create and S-Corp or LLC and carry the losses forward each yr resulting in no taxable income on the property other than property taxes. From my recollection I think the only two things he could get stuck on is not showing any personal income and you can only show a loss for 5yrs before it throws up a flag to the IRS. I only ask this b/c if he can not find a buyer, if he decides to sell, this might be the best case inwhich he can mitigate the negative cashflow.
 
<p>Generally speaking, the losses are deducted from TRock's income every year unless he makes over a threshold amount. If TRock does make over a threshold amount the losses over the threshold amount are carried forward without his having to form anything. It is unlikely losses outweigh capital gains from So Cal real estate, especially after recapturing allowable depreciation. Showing a negative AGI is a flag to the IRS no matter how many or few years one has done it or what has caused it. It is not unusual to show a loss on rental property and showing a loss from a schedule E is not necessarily a audit flag, even multiple years of loss, especially in Southern California. And just to make sure that no one accuses me of misleading anyone, I am an Enrolled Agent.</p>
 
Awgee....but forming an LLC does not mean he is showing a negative "AGI" because for one he could show that the business is making no money thus he can't pay himself and two that he would still be submitting his normal 1040 from his "real" job.





What I was getting at is that if he starts an LLC now and reports the property through the LLC then he can not get hit on taxes realized from the rental payments. If his friends move out he could then possibly charge a higher rent, so he implied, which means for that first yr he should pay minimal taxes on the rental income as he has carried the losses over from previous yrs. Also, I am assuming their would be a benefit on the interest on the loan and that he would have to somehow sign the loan over to the LLC.
 
Trooper....I know what you mean. However, when dealing with people of those likes you have to let it go in one ear and out the other. He obviously is not adding anything constructive to this blog.
 
<p>mino - Honestly, I cannot say that I follow your reasoning for forming an LLC. We obviously don't know TRocks specific tax situation, but generally I don't see a tax advantage for a normal taxpayer who owns one or two rental properties to form an LLC. Most partnerships and single owner corporations are treated as a pass through with no tax advantage or disadvantage. The income and expenses are still reported on a schedule E. My understanding is that folks form LLC and other single owner partnerships for legal and liability reasons which is beyond my scope.</p>

<p>I mentioned a negative AGI only because you mentioned not showing any personal income and how that could raise a flag if it continued for five years, unless I misunderstood. Not showing any personal income, or as I call it, having a negative AGI, raises an IRS flag no matter if for one year or ten years. There is no five year limit or threshhold.</p>

<p>Most folks who have one or two "income" properties in So Cal show a loss on those properties, due not only to the difficulty of achieving positive cash flow, but mostly due to allowable depreciation, therefore negating any need to transfer the properties to any form of partnership or LLC or single owner corporation to show a loss. And I doubt that any sort of transfer would achieve any tax advantage or tax deferment.</p>

<p>As I understand it, limited liablility corporations are formed to limit personal liability, and I do not know of any tax advantage, nor do I think there are. I hope this helps instead of confuses.</p>

<p> </p>
 
Awgee....I was always under the impression it was for both liability and tax protection. If you never created an S-Corp or LLC for you business then all revenues would be taxed as income....thus putting you way up in the tax bracket depending on the success of your business.





Where as if you create an LLC or S-Corp properly you can take a salary that is proportionate to your revenue. Then your EBITDA is the only thing that is taxed and that is at the State and Federal levels only....no s/s, medicare, fica, futra...etc. (sorry if my acronyms are off). Anyways, it is just an idea that if he must keep the property it could be something that might help him out but I would strongly advise talking to an accountant who can lay out both scenarios for him.
 
<p>awgee,</p>

<p>If the income property is under a LLC or S-Corp, then the income is passive income, and that owner can not manage the property him/herself?</p>
 
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