Buying Investment Property

A rental has to work on paper before it works in real life. Before we write an offer, I help you gather the real costs: the purchase price, insurance, property taxes, HOA or condo dues, management, repairs, and the months it may sit empty. Rent figures come from property managers and actual leases, not from a hopeful listing description. You decide whether the result meets your goals, and your CPA and lender check the parts that are theirs.

The IRS treats advance rent as income in the year you receive it, while a security deposit you must return generally is not income unless you keep it. You can deduct ordinary expenses of renting, including repairs and depreciation, and rental real estate is reported on Schedule E.

Personal use changes the rules. The IRS treats a home as a residence if you use it personally for more than the greater of 14 days or 10 percent of the days it is rented at a fair price, and that limits what you can deduct. If you rent a home you also live in for fewer than 15 days in the year, you do not report the rent and do not deduct rental expenses. Your CPA applies all of this to your own numbers.

A like-kind exchange under Section 1031 lets you trade real property held for business or investment for other real property of the same kind and defer the tax on the gain. Since January 1, 2018, it applies only to real property. It does not apply to property held primarily for sale or to a home used only as your personal residence.

The deadlines are strict. In a deferred exchange, you must identify the replacement property within 45 days after you transfer the property you are giving up, and you must receive it within 180 days or by the due date of your tax return including extensions, whichever comes first. The IRS treats a deferred exchange made through a qualified intermediary as a like-kind exchange, and the exchange is reported on IRS Form 8824. Your CPA and intermediary set the plan, and I find properties that fit inside those dates.

I pull sales comparables, ask for rental history and the HOA's rental rules, and connect you with property managers who can speak to rents and occupancy. On a 1031 purchase, I keep the identification and closing deadlines on the calendar from the first showing. If you are also selling a property, my approach to selling runs alongside the search. When you have a budget and a goal, call me and we will look at real properties against them.