Quote:
Originally Posted by Haggar
I get this question a lot. And my answer to my clients is this.
First look at the purchase as an investment. Is is going to make money - taking into account the cash flow? If it loses money will the appreciation be greater than the money lost.
One doesn't want to lose $100 to save $20.
I get a similar question about buying equipment to get a tax deduction - And the answer is not if you don't need the equipment.
The building part of the rental property is written off at approximately 4% a year - not the land. The principal part of any loan payment is not tax deductible. Accordingly cash flow may be different than the tax profit or loss.
If you lose money the loss may or may not be tax deductible depending on your adjusted gross income. If it is not deductible in a particular year it is carried forward until a profitable year or fully deducted when the property (or a replacement property) is sold.
The gain is calculated by taking the original cost and improvements less depreciation allowable against the sale price less related sales expenses. This gain is taxed at the capital gains if the property is held more than one year. A loss is deductible against other capital gain income. Net maximum losses in a year can be deducted up to $3,000 a year. Any excess CG loss is carried forward.
If you move into a rental property and live ii it as a principal residence for two of the five years prior to sale you may escape capital gains. This works as well if you live in a house, convert it to a rental and sell within three years of having the house qualify as your primary residence for the required time.
Summary - buy a house for rent only if it makes economic sense.
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Question: If you move into a rental property that has appreciated before you moved in, can you escape the capital gains that occured before you moved in? And, what about the depreciation deductions that you took while the property was a rental property? Do you need to recapture these?