Announcement

Collapse
No announcement yet.

Rental property selling at a loss

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Rental property selling at a loss

    I bought a rental condo for 200K several years back. The mistake I made was I bought it fully with cash. It is not really making any returns, as the HOA fees as $ 500/ month and the property tax is close to $ 500/ month. The total rent we get is just about $ 1300 but there is always one repair or other. So, at the end of a year, it is close to just about 1K.

    I was thinking of selling, but it looks like I am looking at a big loss - after all expenses, incl. realtor fees, the net amount will be just about 160K.

    So, how does the tax deductible work for this. Will the rental property loss (40K) be deducted against the total income, and a new tax calculated based on that?

    If yes, that is still a pretty big blow (close to 23K net loss), would anyone advise to still do it or is it better to still continue renting and make 1K

    Hoping someone can chime in with advice and their experience, especially when selling a property at a loss

    Thanks a lot

  • #2
    Originally posted by rescuebot View Post
    I bought a rental condo for 200K several years back. The mistake I made was I bought it fully with cash. It is not really making any returns, as the HOA fees as $ 500/ month and the property tax is close to $ 500/ month. The total rent we get is just about $ 1300 but there is always one repair or other. So, at the end of a year, it is close to just about 1K.

    I was thinking of selling, but it looks like I am looking at a big loss - after all expenses, incl. realtor fees, the net amount will be just about 160K.

    So, how does the tax deductible work for this. Will the rental property loss (40K) be deducted against the total income, and a new tax calculated based on that?

    If yes, that is still a pretty big blow (close to 23K net loss), would anyone advise to still do it or is it better to still continue renting and make 1K

    Hoping someone can chime in with advice and their experience, especially when selling a property at a loss

    Thanks a lot
    I would read up on the IRS publications on using your property as a rental as well as the publication on selling your property. You want to make sure you have accounting of all purchase and sales expenses listed in the IRS publication that will adjust your basis (up). Then, any improvements (also listed in the IRS Pub) will increase the basis. You'll have several things going on when you sell. Form 4797 will be used for the sale of the property and will flow back to Schedule D. Depreciation recapture goes there too I believe. I'd be surprised if you don't have loss carry forward for prior losses from that rental. You should have been taking depreciation - on the building ONLY (not the land). Your assessor should describe how much of your tax assessment is land vs building. This amount should have been taken as an expense every year it's been in service. Based on what you describe above I'd be amazed if you didn't have losses most years. Those losses should not have been applied to your 1040 previously but on sale can be fully realized and will flow to the 1040. Hope this helps.

    Comment


    • #3
      Have you had a realtor in to give you an estimate on sales price? I know RE markets are regional but I'm still surprised to hear anyone is selling at a loss in this market.

      Comment


      • #4
        You should sell. The reason for that is this is an awful investment in terms of return. Oftentimes condos do not make good investments.

        As a general real estate investment guideline, your NOI, net operating income, should be about half of the monthly rent. You are nowhere near that. Your property taxes alone are almost 5 months of rental payments, and your HOA fees the same, almost another 5 months. This property would have to rent for north of 2000 per month to make sense as a rental property.

        1300/month rent = 15,600 annual rent
        less 780 vacancy
        less 6000 property taxes
        less 6000 HOA fees
        less 780 annual estimated maintenance
        net operating income = 2,040 per year

        You are earning 1% on your investment, and you have to self manage it. If you were using professional management, you would be earning close to zero each year on your investment. This is an abysmal return. In particular since you paid cash for this property.

        When you are considering purchasing rental real estate, it is wise to run a pro forma, a business analysis of the numbers. It is not like buying a home, which is based on having a good place to live. Purchasing investment property is a business decision based first and foremost on the numbers. You want to earn 10% cash on cash in most cases, perhaps a bit less, but much less and it isn't worth your time.

        Our latest real estate investment will return roughly:

        9.5% cash on cash return
        3% estimated market appreciation with 80% LTV leverage = 15% appreciation on cash in deal
        11% debt paydown (tenants pay down the mortgage principal with rent payments each month)

        = 35.5% total return per year prior to tax sheltering considerations

        46% first year return in the form of tax sheltering from bonus depreciation deduction

        = 81.5% total return in the first year

        If it all works out and we get our 81.5% first year return, then that is an awesome real estate investment. Get educated if you want to invest in real estate! It isn't as simple as buying an index fund.

        Comment


        • #5
          Thanks so much for that. Really appreciate it.
          ENT Doc - I started checking out the IRS publications regarding this. I think the person who does my tax return hasn't put any depreciation so far. But the IRS publication is indeed a very useful resource.

          State of my head - I know it sounds crazy to take that big a loss when the market is hot everywhere. I was shocked as well when my realtor quoted that!.

          White Beard - thank you so much for the detailed explanation. The example u gave was super helpful....and the advice received in these posts definitely helped me decide. Thank you all!

          Comment


          • #6
            Originally posted by rescuebot View Post
            I think the person who does my tax return hasn't put any depreciation so far.
            There is an IRS rule that requires you to pay for depreciation recapture when you sell, regardless of whether or not you took the depreciation deductions over the years that you owned the property.

            Definitely look at your prior year tax returns to see if you have depreciation deductions reported there. If not, you may need a new accountant.

            Comment


            • #7
              Oh wow..I checked all the tax returns...and no, I dont see that in Schedule E.

              On going through the IRS publication, I see now how useful rental depreciation could have been!

              However, there was still a query I have, for which I wasn't able to find a proper answer ...

              So, would it be possible to take the depreciation for that last few years by making an amended tax return...I was not able to see the rules specific to retro-actively applying depreciation.
              Last edited by Hank; 07-18-2021, 05:54 AM. Reason: Corrected typo

              Comment


              • #8
                Doesn't paying down the loan always worsen the ROI?

                Comment


                • #9
                  Originally posted by burritos View Post
                  Doesn't paying down the loan always worsen the ROI?
                  If the rental property is appreciating in value, being leveraged increases your return, but it also increases your risk.

                  You can say the same about stocks, buying on margin increases your return in a rising market, and at the same time, increases your risk.

                  Comment


                  • #10
                    Originally posted by rescuebot View Post
                    Thanks so much for that. Really appreciate it.
                    ENT Doc - I started checking out the IRS publications regarding this. I think the person who does my tax return hasn't put any depreciation so far. But the IRS publication is indeed a very useful resource.

                    State of my head - I know it sounds crazy to take that big a loss when the market is hot everywhere. I was shocked as well when my realtor quoted that!.

                    White Beard - thank you so much for the detailed explanation. The example u gave was super helpful....and the advice received in these posts definitely helped me decide. Thank you all!
                    WBD does an excellent job on real estate. The only piece in his illustrations is the difference between permanent tax benefits and timing. That recapture comes back to bite the cash flow if you don't stay in the game.

                    Comment


                    • #11
                      Originally posted by rescuebot View Post
                      Oh wow..I checked all the tax returns...and no, I dont see that in Schedule E.

                      On going through the IRS publication, I see now how useful rental depreciation could have been!

                      However, there was still a query I have, for which I wasn't able to find a proper answer ...

                      So, would it be possible to take the depreciation for that last few years by making an amended tax return...I was not able to see the rules specific to retro-actively applying depreciation.
                      Is your “accountant” an actual CPA, or just a bookkeeper or tax preparer?
                      Missing depreciation on a rental property seems like a rookie mistake.

                      Comment


                      • #12
                        Originally posted by rescuebot View Post
                        Oh wow..I checked all the tax returns...and no, I dont see that in Schedule E.

                        On going through the IRS publication, I see now how useful rental depreciation could have been!

                        However, there was still a query I have, for which I wasn't able to find a proper answer ...

                        So, would it be possible to take the depreciation for that last few years by making an amended tax return...I was not able to see the rules specific to retro-actively applying depreciation.
                        Yes, you can correct mistakes on prior returns by going back and filing an amended return. But that is generally limited to the last 3 years. How long have you been renting this condo?

                        Comment


                        • #13
                          Originally posted by White.Beard.Doc View Post

                          If the rental property is appreciating in value, being leveraged increases your return, but it also increases your risk.

                          You can say the same about stocks, buying on margin increases your return in a rising market, and at the same time, increases your risk.
                          Can't decide whether to pay down mortgages or throw money at all time market highs. 1st world problem that no one cares about I suppose.

                          Comment


                          • #14
                            Originally posted by rescuebot View Post
                            Oh wow..I checked all the tax returns...and no, I dont see that in Schedule E.

                            On going through the IRS publication, I see now how useful rental depreciation could have been!

                            However, there was still a query I have, for which I wasn't able to find a proper answer ...

                            So, would it be possible to take the depreciation for that last few years by making an amended tax return...I was not able to see the rules specific to retro-actively applying depreciation.
                            I made the same error while filing taxes (apparently incorrectly) on my own. @jfoxcpacfp was so helpful helping me fix this

                            Comment


                            • #15
                              Op. Better learning these ropes now with a small 500k investment than a 2m commit.

                              Condos rarely are good investment vehicle .solely because the fee usually outsizes any benefit and just a cash flow drain.b just like NNN is the best commercial route, no condo/Mello roos/community/utility fee are best for residential.

                              Yes, three year lookback for amendment of taxes. Get a new tax person. Even a tax prep review should have caught business expenses and noted no depreciation claims on the worksheets.

                              Sell/keep. Up to you. Don't know then circs behind the property. The best is to either sell and cut losses or see a way to improve the balance sheet.

                              Maybe worthwhile to sell to the rentor to save commissions, but don't underprice it either in this environment.

                              Comment

                              Working...
                              X