As an Investor if you have a home in which you have lived in for two of the last five years, then this is great news which you will now be allowed to sell your home and take the profit tax free “up to $250,000 being single or $500,000 if you are married”. With that said, you are able to now take those proceeds and reinvest in another area and more than likely double and may even triple the rental income cap and / or yield rate.
This equity that you would now have can be used to invest in real estate, and taken the advice above if you did invest the proceeds of your home sale in a rental property you now will be able to depreciate the property, versus an owner-occupied property which you are not able to. For Example if you have $475,000 structure on a 27.5% year flat line depreciation, then it would equal a write off of $17,272.00 per year. With this said Investment property owners are able to write off operating expenses from one-time or routine maitenance and much more. Some will argue that it’s not a better option than living in your own home as owner-occupied due to the fact that you are not able to write off the mortgage interest and taxes as the standard deduction. However the bonus is that when tax season comes around you are all to write off mortgage interest without the $750,000 cap that you would typically get from an owner-occupied property, which you can write off all of your local property taxes without looking at a cap. Most will also take advantage of the 1031 Exchange for their investment property and defer the entire gain even if it exceeds the $500,000 for married couples or the $250,000 for single individuals. Also do not forget the ability to use a pass-through entity like an LLC which an investor can find themselves in a lower tax bracket than they would as an individual.
There are always Pro’s & Con’s to everything, so here are a few that you may want to look at.
Being a tenant:
There is flexibility due to the fact, you can call your landlord at anytime for any repairs that are needed and not having to worry about the out of pocket cost, and once your lease ends you are able to pick up and move. However, this does mean that the landlord can also give you notice to vacant when they need to or if they want to sell it, along with restrictions on painting walls etc. Though come the end of the year, depending on what your monthly rental rate is you have given thousands of your dollars to an investor and lined their pockets and you will never get any of that money back.
Being an Investor:
If you rather not be hands on and hire a property manager for the property then you will have to pay a 6-10% on average for the property manager which can eat into your profits. Also if your tenants do not pay rent you hav to deal with collecting the monies and or evictions etc, though you have all the other benefits we have previously discussed.
Other things to consider:
Before you start investing, its always recommended to consult your CPA and or attorney on how to set your business up for partnerships and or LLC’s etc as well as go over your tax brackets and monies because each scenario is different for each person.
If you have any questions or want guidance in your investment career contact our DFW Elite Living Team at Info@DFWEliteLiving.com or via phone at 469.912.0499, were here to help.