Apartments for Low Income

Questions and Answers

Your Questions About Duplex Plans

April 20, 2013

Maria asks…

Buying a duplex in foreclosure and want to use it as collateral after loan is paid.?

I am buying a duplex in foreclosure for 40k. We already have tenets lined up and it’s a turn key property. We plan paying it off it 2-3 years.

My question is if the house gets appraised at 130k (it’s value 4 years ago) can I go to a bank after the house is paid off with that appraisal and get a 130k loan using the house as collateral to buy another property with? Basically I want to buy this place for 40k pay it off and use it as collateral to buy a second property.

Second question is if I can get the loan can I use that 130k to buy more then one property. Example would be two duplexes in foreclosure. Or would I have to get separate loans?

Administrator answers:

You can get a second loan anytime you have equity in a property. However, the second or re-fi will not provide you with 100% loan-to-value. At best, you might get 85% loan-to-value, meaning that if you pay off the original loan and then get the property appraised again at $130K (don’t count on it – prices for real estate have dropped and I would expect that your property has been hit as well), you will be able to borrow maybe$105 to $100K. After that, you can do anything you want with the money (buy one property, buy two properties, whatever).

Sharon asks…

Tax writeoff rennovations on a duplex with a FHA loan?

I recently purchased a duplex and in order to do so I used an FHA loan. The FHA loan requires me to have one of the units as my primary residence for a minimum of 1 year from my move-in date. I plan on moving out as soon as the year is up so I can rent the entire duplex out to collect income off of it. Since I reside in one side can I only expense the depreciation of 1/2 the purchase price over 27 1/2 years within the first year? Is there a way that I can depreciate the entire purchase price after I move out and rent out both units? Also if I want to make “regular” maintenance rennovations to my side (paint, siding, drywalling, carpet, etc) within the first year I am living there is there any way that I can expense that off of my income?….I read this in an article regarding a question kind of similar to mine:

If a paint job is part of a major remodeling of the entire property, it — and the rest of the remodeling — would be treated for tax purposes as a capital improvement. That means the expense would have to be depreciated over a 27 1/2-year period, beginning when the project is completed.

Can I declare my major remodeling of the entire duplex starting this year, keep all of my receipts for the entire remodel and then declare it completed the day I move out and its rented to someone else and expense everything after that? I am hoping there is a gray area or crack I can slip through in the ruleing on expensing rennovations I do this year, as it is much easier to do them while im living there.

Any help on this is appreciated…..

Administrator answers:

I would suggest a consultation with a local CPA or EA who specializes in small business taxation with some emphasis on rental properties.

For depreciation purposes the first hurdle is that can’t depreciate the land, only the house itself, so you need to break out the cost of the land and the cost of the house separately. I’ve had that challenged before, so a professional appraisal is a wise idea. At least have information on the costs of empty lots in the area (assuming that there are any) for your historical records.

You’ll have to depreciate each side separately since you’ll be living in one side and renting out the other. You can’t depreciate the side that you are living in until you convert it to rental use.

Your basis for depreciation on the rental side will be your original cost basis plus cost of any major repairs or renovations directly related to the rental unit. Common renovations (such as a new roof) must be apportioned between the two. Painting does not qualify as major renovation unless you repaint the entire property or are repairing damage left by a prior tenant so you can often deduct the cost as a maintenance expense. Of course, painting the side that you live in isn’t deductible, only the rental side.

Once you move out and convert the other side, you’ll need to get a formal appraisal from a licensed appraiser. Your basis on the side that you occupied will be the lesser of the original basis plus any renovations or the fair market value at the time of the conversion. Use that appraisal to apportion between the two sides. The basis of the original rental won’t change but if property values dropped the basis on your old residence may be less.

There are not may cracks to slip through on maintenance expenses vs capital improvements. Painting is one that you sometimes can get through as an expense but if you painted the entire property inside and out the IRS may see that as a capital improvement. All renovations are tracked separately but are depreciated on the same 27 1/2 year schedule as the building is.

Also watch out for the active participation rules. You must actively participate in the rental activity in order to take any tax losses in excess of your rental income. That does not mean that you can’t turn it over to a property manager for routine day-to-day management (which I highly recommend) but you must retain major decisions such as final approval of all proposed tenants and approval of all major expenditures for repairs and renovations.

Another tripping point are the passive activity loss limitations. If your AGI is too high, you can’t show a loss greater than your rental income but must carry it forward. (There’s also an at-risk rule but if you have a mortgage on the property or bought it with your own funds, that won’t come into play.)

The final “gotcha” is the depreciation recovery when you sell. Depreciation allowed OR ALLOWABLE is recovered at sale time and is taxed at a higher rate than normal long term capital gains, up to 25%. Any passive activity losses carried forward because of the passive activity loss limitations can help to reduce that hit.

As you can see there’s a lot to consider and many potential traps in rental property, so I’m back to my recommendation of a consult with a local tax pro before you paint yourself into the proverbial tax corner.

David asks…

I am selling a duplex in Sacramento for 500k how much would I have for a 1031 after fees ?

Bought in 1996 for about 100k. Assuming I use a realtor to sell the place….also how much would I have if I just sold the place and kept the money (I am an unemployed recent graduate so my only income as of yet is from rents (25k a year))… ALSO—> I am planning on using the 1031 to purchase investment property in Austin TX where I can get a far better %return, the problem is that the prop. tax is high (2.75%)…is the prop tax deductable on fed income tax? ALSO…will I have to pay CA state income tax when I sell the prop in Texas?

If you can answer ANY of the question I would be greatful…

peace

Administrator answers:

Wow!

My first thought is to talk to a CPA that specializes in real estate.

I have done several 1031′s, even some muli level ones and it can GET COMPLICATED in several areas.

Simply put, to do a 1031 it has to be for a like property (duplex) and the equity transferr has to match ($400K out $400K IN) I don’t know where you are going to find a duplex in Austin that will fit.

With $400K maybe you can buy it CLEAR and collect the rent. Rents are MUCH lower in Texas, so keep that in mind. Check rent.com and type in the zip code, you will be surprised. Looks like you are getting about $2K a month in Sacramento.

I am shooting from the hip here (I was married to a HIGH end real estate CPA and wrote her newsletters so I am going into the dust bunnies under the couch)

You will get a write off for taxes on both state and fed.

When you sell the place in Texas you will have to pay capital gains tax on BOTH your State and Fed taxes (CA. Gets NONE if you change your residance to TEXAS)

If you are not a trust fund kid with NO WORRIES you might consider moving into one of the units until you score a job.

Bottom line, TALK TO A CPA AND PAY $200 AN HOUR to get the best info you will get in your LIFE!

Good luck,
J

Linda asks…

Restroom vs. Dining Room/Nook for new duplex?

I want to build a duplex but can’t find a plan with all my needs. One has 2 bathrooms per unit but no place for dining. The other has 1 restroom but a separate dining room. Also one of them has better curb appeal. What is more important to have— a place for dining or 2 restrooms? I can get custom prints but it would be more costly.

Administrator answers:

The average number of children per Jewish household in Israel is apparently 2.2 , so where are you going to put that extra 1/5 of a child? In your half room, of course!

No, not really. But today I want to post quickly about something that mystified me before I came to Israel– how Israelis calculate room numbers in apartments.

In the US, our current apartment would be considered a two-bedroom apartment, because… Well… It contains two bedrooms. Simple enough. Here, though, it’s considered 3.5 rooms. The living room (but not the huge kitchen) counts as our third room, and the little nook in the picture above– officially a “dining nook” or pinat ochel, but for me it’s an office– as a “half” room. Our closed balcony, which we actually use as a dining room, and the separate toilet room and bathroom, and the “michpeset shirut” where we have our washer and dryer– none of those count as rooms either. Nope, this apt. Boils down neatly to 3.5 rooms, and that’s that. (Btw, this means that a “one room” apartment in Israel is an efficiency, containing ONLY one room. Plus maybe a bathroom or balcony or kitchen.)

In about a year we’ll start looking for an apartment or house to buy, and already I’ve been lusting over real estate and figuring out some more oddities of Israeli terminology. For example, a “cottage” (that’s actually how you say it in Hebrew– ‘????) means a house attatched to another house… Which in the US I’d tend to call a duplex. A “duplex,” on the other hand, which is also a term used in Hebrew (??????), means a house or apartment with two stories. Then there’s the difference between a “villa” and a “bayit prati,” which I still don’t understand. Except that maybe a villa is bigger.

Oh, and an Israeli “first floor” apartment is actually on what would be the second story in the US. (The ground level in our building contains parking and storage lockers.)

Check out Israeli real estate listings here, if you’re interested!

The moral of this post? Don’t assume that you know what terms mean– just because words sound like English doesn’t meant that they carry the same meaning.

P.S. Yesterday, for the first time, over 100 visitors came to this blog in one day! (We’ve been right up at about 90 visitors for a while.) That’s so exciting! Thanks, everyone! Oh, and er, don’t ask me how many of those visits were me checking back. I’d prefer not to know. ;)

Daniel asks…

80/20 ARM Loan HIGH RATES on a duplex 20yr old investor Am I screwed? Plz Help!!?

I am 20 years old from washington, I managed to get a loan and buy a duplex w/$0 down 80/20 Arm loan 80@7.5% 115,000 and 20@11.5 32,000 Yes rates are very high but w/ 0 down and no assets I had to take what I was given. I will be paying interest for the first 2 years and I have no extra money to pay extra on top of my minimum payment. I am losing $. I rent out both units@$1125 + $115 water +75 add to mortgage payment so I’m losing $190 a month, I cannot raise rent it’s already up there. I cannot refi for atleast 2 years. I bought the duplex for 147,000 (including closing costs). It’s been appraised at only 148,000 so I bought it at top dollar. Lol I am 20 come on =).I’m curious should I just sell in 2 years and walk out? Since rates are going up I cannot afford paying my bills plus property additional bills.Both tenants are planning to stay for atleast 2 years.I plan to expand after I take care of this prob.Provide me w/ some thoughts on what you think + what future holds for me. THX!!
Please be judgemental on this, you can judge me all you want either I am screwed or there is a future for me? I mean I pay all my bills (I’m currently paying rent) + add some money to hold up the duplex. It’s working good so far, I cannot raise rent keep that in mind so I cannot make them pay water, sewer, garbage. I got this as my primary residence I am just lying and “supposably” living there. So yes it is my PRIMARY RESIDENCE. Even if I decided to move in rent would be 600 vs 450 I pay now and it’s very comfortable and my landlord has not raised rent for YEARS and does not want to, so I am holding on to this and plan to live here. I just want some opinions for what is waiting for me in the future disaster? or wealth? I want to expand as well I know rates are going up and since it’s adjustable it’s probably going to go up in 2 years. My credit is wonderful and going up so I HOPE i get a fixed in 2 years and expand from there. THanx for your feedback in advance!

Administrator answers:

Because you are listed as an owner occupant it would be complicated to if not impossible to turn this into a business but if you had thought to do that you could have depreciated the property and had some other tax benefits. I do agree with the responder who inferred that over some period of time you’ll make money if you hold but how long and if it will be genuine earnings isn’t clear. Here is what I would do:

1) Calculate the tax benefit you are getting from your mortgage interest deduction. Do your taxes with and without the mortgage interest deduction. This will tell you the true tax benefit.

2) Make a guess at when you think rent will equal or exceed actuall carring and operating cost.

3) Estimate what if any maintenance and/or improvement costs will be necessary between now and your breakeven point.

4) At the date you derrived in step 2 estimate what you believe the value of the property will be.

5) Now if you know how to run a net present value model your all set to know whether it makes sense to keep or sell the property even at a loss. If not you can just add up all of your costs between now and the breakeven date, subtract the tax benefits and that will roughly approximate you cost of ownership. You can get much more precise by including opportunity costs and discount rate factors but the simple math will get you close. Now subtract that from from what you think the value increase of the property will be on your breakeven date. If its a positive number reduce it by 15% to approximate taxes. If the resultant number is smaller than what you could earn by investing $190/month at 5% interest sell it now, if its close, think about it and then sell it now. If its a big positive number and you can tough it out the profit is your reward.

If the number is positive enough you may be able to get an investor (co-worker or friend) to put up the money to pay off the 11% loan for a share of the profit from future sale and the immediate positive cash flow. You have to do a really good job on the numbers but if you do you can probably get an investor and turn things around.

I think you had a great idea but should have gotten some professional help in figuring out the financials before you bought.If you can get out from under the 11% loan you would be sitting fine.

Even if you have to bail out of this one your losses would be less less and a year of college and much more valuable. You’ll do it again and just keep getting better at it. Good luck

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