Interesting proposition for a home...

A

akim997

New member
I've received an interesting proposition from my mother that I thought I'd share... 

My mother received some pretty good unsolicited offers on some property she owns.  Its a good property, but 1) she's tired of managing it and 2) she doesn't want to pay a property manager.  If she decides to sell, she would do a 1031 exchange to another property and was kicking around the idea of purchasing a home and renting to me (still ok for the 1031, as long as its "market" rent).    While it is her asset, obviously, her real property is ultimately coming to the kids at her passing.  General consensus is that Irvine RRE does not make a good investment.  However, she sees this as a way to 1) help her child looking for a house (I'd keep my current house and rent it for positive cash flow) and 2) generate good income (there would be no mortgage). 

I'm trying to weigh the positives and negatives from various perspectives.  For my mom, she'd have a pretty hassle-free way of getting some income... however, she limits upside asset growth owning Irvine property.  For me, I can get into a house without worrying about buying anything (my 3 year search would end).  The bad would be that by renting my current property, I would lose some tax deductions (I'd just be left with a passive loss carry-forward until I sold the house).  Looking at the tax rate schedules, I'd definitely have to bump up my withholding and would take an effective income haircut in addition to the rent I'd be paying.  I think about the scenarios, and can see where if she just would have held on to her current property, that it would increase substantially in value (apts near downtown LA) to the point that upon future sale, I could buy a home in Irvine and have cash left over... 

The ultimate strategy would be that I would get the house upon her demise, so its a conservative, attractive proposition for me.  My concern with renting for the longest time is that I hate moving and feeling "unsettled"... this wouldnt be the same. 

Am I missing anything here?
 
akim997 said:
I've received an interesting proposition from my mother that I thought I'd share... 

My mother received some pretty good unsolicited offers on some property she owns.  Its a good property, but 1) she's tired of managing it and 2) she doesn't want to pay a property manager.  If she decides to sell, she would do a 1031 exchange to another property and was kicking around the idea of purchasing a home and renting to me (still ok for the 1031, as long as its "market" rent).    While it is her asset, obviously, her real property is ultimately coming to the kids at her passing.  General consensus is that Irvine RRE does not make a good investment.  However, she sees this as a way to 1) help her child looking for a house (I'd keep my current house and rent it for positive cash flow) and 2) generate good income (there would be no mortgage). 

I'm trying to weigh the positives and negatives from various perspectives.  For my mom, she'd have a pretty hassle-free way of getting some income... however, she limits upside asset growth owning Irvine property.  For me, I can get into a house without worrying about buying anything (my 3 year search would end).  The bad would be that by renting my current property, I would lose some tax deductions (I'd just be left with a passive loss carry-forward until I sold the house).  Looking at the tax rate schedules, I'd definitely have to bump up my withholding and would take an effective income haircut in addition to the rent I'd be paying.  I think about the scenarios, and can see where if she just would have held on to her current property, that it would increase substantially in value (apts near downtown LA) to the point that upon future sale, I could buy a home in Irvine and have cash left over... 

The ultimate strategy would be that I would get the house upon her demise, so its a conservative, attractive proposition for me.  My concern with renting for the longest time is that I hate moving and feeling "unsettled"... this wouldnt be the same. 

Am I missing anything here?
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Well, the rent that you pay is not going to a perfect stranger...it's going to your mother.  When she passes away, you'll most likely get the home.  And most importantly is that you won't have to use up most of your cash to purchase a home (cash is king nowadays).  Sounds like good news for you guys, good luck.
 
akim997 said:
I've received an interesting proposition from my mother that I thought I'd share... 

My mother received some pretty good unsolicited offers on some property she owns.  Its a good property, but 1) she's tired of managing it and 2) she doesn't want to pay a property manager.  If she decides to sell, she would do a 1031 exchange to another property and was kicking around the idea of purchasing a home and renting to me (still ok for the 1031, as long as its "market" rent).    While it is her asset, obviously, her real property is ultimately coming to the kids at her passing.  General consensus is that Irvine RRE does not make a good investment.  However, she sees this as a way to 1) help her child looking for a house (I'd keep my current house and rent it for positive cash flow) and 2) generate good income (there would be no mortgage). 

I'm trying to weigh the positives and negatives from various perspectives.  For my mom, she'd have a pretty hassle-free way of getting some income... however, she limits upside asset growth owning Irvine property.  For me, I can get into a house without worrying about buying anything (my 3 year search would end).  The bad would be that by renting my current property, I would lose some tax deductions (I'd just be left with a passive loss carry-forward until I sold the house).  Looking at the tax rate schedules, I'd definitely have to bump up my withholding and would take an effective income haircut in addition to the rent I'd be paying.  I think about the scenarios, and can see where if she just would have held on to her current property, that it would increase substantially in value (apts near downtown LA) to the point that upon future sale, I could buy a home in Irvine and have cash left over... 

The ultimate strategy would be that I would get the house upon her demise, so its a conservative, attractive proposition for me.  My concern with renting for the longest time is that I hate moving and feeling "unsettled"... this wouldnt be the same. 

Am I missing anything here?
Click to expand...

Isn't your rental property cash flow positive? So your cash flow should go up even though you lose some deductions. Also there are numerous other deductions you could consider as a landlord,http://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.htmleven as you lose your primary home interest deduction.

If you don't want to be a landlord, why not sell your current residence? If you believe Irvine RRE appreciation is limited at best, then what is the point of holding onto your current place...certainly not for a recovery of prices? On other hand, if you believe your current home will recover in price over xx years, then your mom's place should also increase in price right?



 
so_scared said:
akim997 said:
I've received an interesting proposition from my mother that I thought I'd share... 

My mother received some pretty good unsolicited offers on some property she owns.  Its a good property, but 1) she's tired of managing it and 2) she doesn't want to pay a property manager.  If she decides to sell, she would do a 1031 exchange to another property and was kicking around the idea of purchasing a home and renting to me (still ok for the 1031, as long as its "market" rent).    While it is her asset, obviously, her real property is ultimately coming to the kids at her passing.  General consensus is that Irvine RRE does not make a good investment.  However, she sees this as a way to 1) help her child looking for a house (I'd keep my current house and rent it for positive cash flow) and 2) generate good income (there would be no mortgage). 

I'm trying to weigh the positives and negatives from various perspectives.  For my mom, she'd have a pretty hassle-free way of getting some income... however, she limits upside asset growth owning Irvine property.  For me, I can get into a house without worrying about buying anything (my 3 year search would end).  The bad would be that by renting my current property, I would lose some tax deductions (I'd just be left with a passive loss carry-forward until I sold the house).  Looking at the tax rate schedules, I'd definitely have to bump up my withholding and would take an effective income haircut in addition to the rent I'd be paying.  I think about the scenarios, and can see where if she just would have held on to her current property, that it would increase substantially in value (apts near downtown LA) to the point that upon future sale, I could buy a home in Irvine and have cash left over... 

The ultimate strategy would be that I would get the house upon her demise, so its a conservative, attractive proposition for me.  My concern with renting for the longest time is that I hate moving and feeling "unsettled"... this wouldnt be the same. 

Am I missing anything here?
Click to expand...

Isn't your rental property cash flow positive? So your cash flow should go up even though you lose some deductions. Also there are numerous other deductions you could consider as a landlord,http://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.htmleven as you lose your primary home interest deduction.

If you don't want to be a landlord, why not sell your current residence? If you believe Irvine RRE appreciation is limited at best, then what is the point of holding onto your current place...certainly not for a recovery of prices? On other hand, if you believe your current home will recover in price over xx years, then your mom's place should also increase in price right?
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My guess is that his current property will be cash flow positive but will generate a taxable loss due to the depreciation expense.  Since he is not a real estate professional, he will not be able to take the active tax loss against his ordinary income and will need to carry the loss forward.
 
Correct.  We dont qualify for the 25000 or whatever it is loss due to income limitations, thus everything would flow through as a passive loss.  Depreciation is one factor why you can be cash flow positive, but in a tax loss situation. 

One of my concerns is that by converting to a longer term rental, I'd forego the section 121 exclusion on sale of the home.  If I wanted to take advantage of that, I'd have to still sell the home within 3 years (to meet the 2 of 5 requirement), but would still be subject to depreciation recapture on a portion (that can't be excluded). 

I've thought about selling the property anyways, because I'm a simple person who doesn't like dealing with headaches.  That being said, at the current level of the market, it seems to make much more sense being a buyer rather than a seller. 
 
So, uh, if you do have your mom buy a house for you to rent... would you buy new or resale? And where?

(it becomes more interesting when you're not using your money to buy the home you're gonna live in... isn't there a new HGTV series? My Money, Your House?)
 
Why do you believe that the property your mom owns currently, if held onto, would more than purchase your house in the future yet you believe the RRE your mom proposes to purchase in irvine has limited capital appreciation?

Do you believe that the downtown LA market will do appreciably better over that time frame given the location and class of property(apts)?


 
akim997 said:
Correct.  We dont qualify for the 25000 or whatever it is loss due to income limitations, thus everything would flow through as a passive loss.  Depreciation is one factor why you can be cash flow positive, but in a tax loss situation. 

One of my concerns is that by converting to a longer term rental, I'd forego the section 121 exclusion on sale of the home.  If I wanted to take advantage of that, I'd have to still sell the home within 3 years (to meet the 2 of 5 requirement), but would still be subject to depreciation recapture on a portion (that can't be excluded). 

I've thought about selling the property anyways, because I'm a simple person who doesn't like dealing with headaches.  That being said, at the current level of the market, it seems to make much more sense being a buyer rather than a seller. 
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If your passive loss carryforward is due to depreciation, why would you need to bump up your withholdings? ...and how would you be taking an effective income haircut? 

It sounds like your potential rent would be enough to cover your mortgage interest and property taxes, normally the only two deductions available to owner occupants, PLUS some of the investor write offs not available to owner occupants.  Sir, I think your write offs will be increasing, not decreasing, and if anything, you should be looking at withholding less.
 
Ok, I think I see what you mean.  Your adjusted income will increase by the amount of your mortgage interest & property taxes, while your effective income will be reduced by the rent you are now paying.  Still, market rents in Irvine are generally less than full PITIA payments aren't they?  You should think about the difference between the mortgage you would be paying if you bought in Irvine compared to the presumably lower rent you will be paying to your mom.  Your effective income might still be higher by renting compared to if you bought.  It's fun stuff to think about.  Good luck.
 
akim997 said:
I've received an interesting proposition from my mother that I thought I'd share... 

My mother received some pretty good unsolicited offers on some property she owns.  Its a good property, but 1) she's tired of managing it and 2) she doesn't want to pay a property manager.  If she decides to sell, she would do a 1031 exchange to another property and was kicking around the idea of purchasing a home and renting to me (still ok for the 1031, as long as its "market" rent).    While it is her asset, obviously, her real property is ultimately coming to the kids at her passing.  General consensus is that Irvine RRE does not make a good investment.  However, she sees this as a way to 1) help her child looking for a house (I'd keep my current house and rent it for positive cash flow) and 2) generate good income (there would be no mortgage). 

I'm trying to weigh the positives and negatives from various perspectives.  For my mom, she'd have a pretty hassle-free way of getting some income... however, she limits upside asset growth owning Irvine property.  For me, I can get into a house without worrying about buying anything (my 3 year search would end).  The bad would be that by renting my current property, I would lose some tax deductions (I'd just be left with a passive loss carry-forward until I sold the house).  Looking at the tax rate schedules, I'd definitely have to bump up my withholding and would take an effective income haircut in addition to the rent I'd be paying.  I think about the scenarios, and can see where if she just would have held on to her current property, that it would increase substantially in value (apts near downtown LA) to the point that upon future sale, I could buy a home in Irvine and have cash left over... 

The ultimate strategy would be that I would get the house upon her demise, so its a conservative, attractive proposition for me.  My concern with renting for the longest time is that I hate moving and feeling "unsettled"... this wouldnt be the same. 

Am I missing anything here?
Click to expand...

I know that I'm just a semi-anonymous shlub on the intarwebz, but I would really strongly suggest contacting an EXPERIENCED TAX PRO with this type of question... one that has many, many years of seeing the good/bad/ugly and who specializes solely in estate planning.

-IR2
 
akim997 said:
Correct.  We dont qualify for the 25000 or whatever it is loss due to income limitations, thus everything would flow through as a passive loss.  Depreciation is one factor why you can be cash flow positive, but in a tax loss situation. 

One of my concerns is that by converting to a longer term rental, I'd forego the section 121 exclusion on sale of the home.  If I wanted to take advantage of that, I'd have to still sell the home within 3 years (to meet the 2 of 5 requirement), but would still be subject to depreciation recapture on a portion (that can't be excluded). 

I've thought about selling the property anyways, because I'm a simple person who doesn't like dealing with headaches.  That being said, at the current level of the market, it seems to make much more sense being a buyer rather than a seller. 
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Yeah, the crappy part is that the IRS will calculate the depreciation and account for it whether you do or not.  Another thing that you need to consider is if you sold the property what would you do the net sales proceeds (how would you invest it and would want of return would you)?  I have a few former buyers who are now looking to purchase a rental property as they are tired getting 1% on their money and looking to diversify outside of the stock market.  Did you put together a proforma for your current home as a rental (with a 1-month vacancy and capital expenditure/repair amount)?  If the property is still cash flow positive with a conservative proforma, that may be another reason to keep the home as a rental since someone else will be paying off your mortgage over time.  Being a landlord is definitely not for everyone, but it comes down to the tenant of how easy or difficult it will be being a landlord.  Good tenants are worth their weight in gold. 
 
so_scared said:
Why do you believe that the property your mom owns currently, if held onto, would more than purchase your house in the future yet you believe the RRE your mom proposes to purchase in irvine has limited capital appreciation?

Do you believe that the downtown LA market will do appreciably better over that time frame given the location and class of property(apts)?

not that the dtla market is that good.  its a multi unit apartment with a decent cap rate and alot of potential.  there are capital issues, though.  You can take our equity lines on 1035 properties, because our CPA indicated that would constitute the receipt of boot.  She can't even sell another property and invest the capital in because she doesnt want to be subject to cap gains on basically the whole amount.  so, she doesnt have a lot of free capital and a mutli unit apartment is a BEAR to run.  from all the fire alarms, to someone crashing a car into the front gate, to many eviction notices... its a lot of effort. 

i know its attractive because she's been receiving ALOT of interest in the property.  my thoughts are someone who is a RE professional with capital can really do well with the property.  its just not me or my mom.                   
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irvinehomeowner said:
So, uh, if you do have your mom buy a house for you to rent... would you buy new or resale? And where?

(it becomes more interesting when you're not using your money to buy the home you're gonna live in... isn't there a new HGTV series? My Money, Your House?)
Click to expand...

just like the show...

but yes, it become VERY interesting.  meeting my mom today to discuss (and potentially show her a couple of places)...    right now, im still thinking resale market.
 
@liar loan.  i think you get me on ur second post.    for example, lets say my mortgage interest and prop taxes for the year were 20K.  assuming im not in amt, the value of the tax subsidy is roughy 12.5K, or over 1K a month.  now, if the int and taxes get carried to sch E rental, then it can get held up as a pl carry forward.  but u are correct, i didnt think about all effects.  the PITA will be about 2050 on my current.  a 3BR,2.5 BA townhome in west irvine.  USCT just rented a smaller place in a neighbooring community for i think around that amount.  i think i can get about 2200 (who knows).  so cash flow positive, but not that positive.  i'd just hold it and rent it because i feel its not the best time to sell (although i dont know when will be).  interesting points  u bring up... ill have to think about it. 

IR2- i do have CPAs at my disposal, and ill get the right advice.  ive done a lot of tax work over the years, but definitely qualified on all fronts.  for example, i thought you could funnel at least the prop taxes over to sch A, similar to what happens in case of sec280a vacation rental.  but im not sure and ill have to seek advice.  as far as estate planning, we don't have any issues.  in general when it comes to below market rent, you only have gift issues at below 80% of FMV (you can discount for family members because they are supposedly trustworthy and you know them).  i am checking but i dont think the same 80 necessarily applies to a 1031.  i have a very good intermediary i am working with (weve used them in the past).  for the house, i helped my mom draft her estate plan where we have specific bequests of property on a schedule.  it can be complex, but ive tried to cross the t's and dot the i's.   

its good to be a part of a forum where you get a lot of good questions and good issues raised.  it helps to make sure you are thinking of the right things.  thanks
 
akim997 said:
so_scared said:
Why do you believe that the property your mom owns currently, if held onto, would more than purchase your house in the future yet you believe the RRE your mom proposes to purchase in irvine has limited capital appreciation?

Do you believe that the downtown LA market will do appreciably better over that time frame given the location and class of property(apts)?

not that the dtla market is that good.  its a multi unit apartment with a decent cap rate and alot of potential.  there are capital issues, though.  You can take our equity lines on 1035 properties, because our CPA indicated that would constitute the receipt of boot.  She can't even sell another property and invest the capital in because she doesnt want to be subject to cap gains on basically the whole amount.  so, she doesnt have a lot of free capital and a mutli unit apartment is a BEAR to run.  from all the fire alarms, to someone crashing a car into the front gate, to many eviction notices... its a lot of effort. 

i know its attractive because she's been receiving ALOT of interest in the property.  my thoughts are someone who is a RE professional with capital can really do well with the property.  its just not me or my mom.                   
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I wanted to share my experience with you....
My family owned a ton of apts in los angeles during the 80s. They always did tax exchanges but they made the big mistake of letting taxes drive strategy rather than optimizing their taxes for the right strategy.

So they kept rolling the equity into bigger and bigger projects. Eventually they owned like 700 units in LA and several hundred more in Orlando. (as an aside, we had a couple of tenants who set fire to their own place and then sued! lol)

The first crack in commercial came with they changed the tax codes to disallow passive losses to offset regular income. They immediately took out all the doctors/lawyers other high income earners as new buyers because they couldn't shield their regular income. But cheap Japanese money kept the market a float still. But when their bubble burst and US S&L crisis blew up in full, the market crashed over night and all the equity was wiped out. They never took out any equity because they were always deferring taxes.

I can't predict what will happen in the future, but I know what happened in the past to my family's business. If interest rates spike, will your potential buyers still offer the same cap rates, etc, etc.

I would say make the right family decision first, whatever that may be and then optimize tax strategies around the best strategy and you will have no regrets.
 
I think your math is slightly off. If taxes and interest were 20k and your benefit is 12.5, that means your effective tax benefit is 62.5%, I think you meant to say your benefit is 37.5% or 7,500 per year.
 
i think i may have got my math off.    looked at some properties today.  it's funny how things change when you shop on someone else's dime.  will report back.
 
i went out on the town with a budget of ~$950K - $1.1MM based on current estimates of the cash from my mom's transaction.  the numbers vary based on multiple offers on the property - some with brokers some without (no commissions paid).  my first realization, is that with such a budget, a lot of properties and options open up for you (i guess i was always too poor to afford our dream house in irvine).  my mom's (and maybe our) preference is to purchase a new (or newer) home to avoid any repair costs in the near future.  this leaves the current choices in irvine at:

Stonegate - Maricopa (an upgraded plan 2 or a plan 3)
Woodbury - San Marino (plan 2)
Portola Springs - Las Colinas (plan 1 or 4)
Laguna Altura - Cortona (plan 2)
Laguna Altura - Toscana (plan 2)

obviously, there are more choices, but these are homes that seemed nice to us.  The wife somewhat dislikes Stonegate and the surrounding area.  I'm not sure if its psychological, but I tend to agree with her in that it feels like a B hood...  yes, just across the street from dense Woodbury, that has apartment villages and all, but it just seems not as nice.  in WB, you do get a "nicer" feel since there are communities of really nice looking houses (i.e. Juliet's Balcony).  In stonegate, you feel like you have the nicest house on the block (we have yet to see what will go into the north eastern enclave).  for high 8's/ low 9's it just didn't seem like the right place.  quickly dismissing stonegate (no offense to those who live there), we moved on...

portola springs - i agree with usc trojan, in that it does seem like a nicer overall area, with the intention of being an "A" type hood... nice parks, street features, trees, etc.  Las Colinas is entering its final phase, and there are i think 16 homes left to be sold.  they no longer sell the plan 2 and plan 3 wasn't to our liking.  first IHO will appreciate the 3 car (although tandem) garage.  in plan 1, they've added a downstairs bedroom and turned the tandem spot into "extra" storage which doesn't bother me because that's what the space would be used for anyways.  Las colinas, being a project that started long ago, does not have some of the "newer" features that are available in the iPac homes such as many-windowed conservatory dining areas, or tankless water heaters, or yada yada...  The floor plans are much more traditional vs. the iPac "open concept".  Plan 1 has a living room parlor adjacent to a side courtyard flanked by a formal dining room.  I still dont know if I am a fan of having a formal DR AND a "morning nook"... seems like a waste of space.  With these additional areas, you give up some great room space, which seems as small as Maricopa 1's.  The kitchen is nice and you have additional features like a nice large pantry.    The upstairs is standard with a nice layout and features including a bonus room.  The nice thing about Las Colinas is that the prices and price/sq ft is MUCH lower than the new iPac hoods - around $320/ft.  The mellos isn't that bad at about $5K per year - well not bad for a $1MM home.  The downside is some of the available homes are right off Portola...  and I'm not a fan of living off of a big street.  Plan 4 was nice, as there is a Casita in case mom decides to reside here in the future - but its also a really small room.  I think I just have weird taste, but my personal preference is towards the newer great room/ open concept plans that are elsewhere in Irvine.  Also, driving past the landfill several times was not great. 
 
At that price point, you can find some really nice newer (not brand new) homes in Irvine in any hood you want.

Take a look at a Tapestry Plan 3 in Quail Hill... or if you get lucky... a Chantilly model.

There are tons of large homes (ie 3CWG) in Westpark II, Northwood Pointe and any of the late 90s early 00s tracts.

And I think you can probably find nice Los Colinas plans in resale so you get new but don't have to worry about landscaping.

Since the money equation is a bit easier for you... I suggest taking your time... it's not like prices are skyrocketing.
 
Once Portola gets built out (with the school, shopping center, and The New Home Company's development) it will feel more like an "A" Village.  Did you guys rule out San Marino over in Woodbury? 
 
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