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Why the IRS LUVS me!!!!

July 12th, 2008 at 05:57 pm

Being a single gal with no kids or deductions is something that the IRS drools over. I'm sure they drool over single men who have no deductions as well...or is that me that drools over them??? Sorry, I digress...I have a small 2 bedroom house in a pretty nice area of my growing city. I paid off the mortgage about 5 years ago (a good thing) but am now being taxed at a really high rate because I have no deductions (a bad thing). Darn IRS won't let me use my two rescued dogs as deductions...hehehehe.

I've been really looking into the option of purchasing a second house. I figure now is the last time in my life ('cuz I'm getting old) that I will see the bottom end of a real estate cycle. What I'm wrestling with the most is if I should buy a second house and move into it or buy one that I'll rent out to someone else.

With the housing prices currently down in my city, I've been looking at several ways I might make this happen.

1) Buy a second house, move into it, then rent out my first house.

2) Buy a second house and rent it out.

3) Buy a duplex or multiple unit piece of property, move into one and rent out the others, including my current house.

4) I know there are other options I haven't thought off. Insert yours here!

The first option allows me to get a house at a lower interest rate and will give me about $1200 a month in income from my current house being rented (not taking into account vacancies). One realtor suggested that I get a loan on my first house since I already own it and pay for the second house in cash. I'm not knowledgable on how that works, but maybe one of you does?

The more I cruise around my town looking for houses, the less inclined I am to move. Seems that I did a good job 16 years ago with location, location, location. There's no way I can afford to upgrade in my own neighborhood! Other neighborhoods aren't looking too appealing in this town.

The second option means that I'll probably have a higher interest rate on the loan and a larger down payment because the purchase is considered an investment. Not sure what the income would be on the house as I havn't found one to buy yet. Would really like the rent to cover the payments...but????

The third option I'm even more confused about. I've heard things like I'll only be able to deduct 1/2 the payment/interest from my taxes if I live in one and rent out the other (duplex as an example). Someone else said it's still an investment property and I'll have to pay the higher interest rate on any loan I get.

Overall, I'm just not sure what to do. I keep researching and reading as much as I can so I have a better idea of what I should do. I have no clue if I'm cut out to be a landlord, but on the other hand, I just can't keep giving so much of my $$ to "Uncle Sam". I'd like to retire at 55, but will probably have to keep working until 62. I won't need a lot of $$ when I retire, but I don't want to have to worry about scrapping by, especially with any health care costs.

All suggestions welcomed!

5 Responses to “Why the IRS LUVS me!!!!”

  1. Ima saver Says:

    Well, we had 3 rentals and it was a terrible experience. Thank goodness my dh is very handy cause he was always called to fix something. The tennants did not care how they treated your house and the rent was always late. We finally sold all three at a loss. (VERY BIG LOSS)

    My FIL decided to build a duplex, live in one side and rent out the other side. Even tho he lived right beside them and they seemed very nice, when they moved out, he had to completely redo the inside of the duplex, it was trashed!! Now, it just sits empty and he pays high taxes on it every year.

    The only way I would buy another house is to let it sit empty and try and make a profit on it when things pick up.

  2. cptacek Says:

    I think buying another house and getting a mortgage so you can rent it out just to get a deduction is silly.

    If you want to be a landlord and set up a business of buying houses and renting them, then treat it like a business. Make a business plan and include all expenses, realistic possibilities of rental income, the amount your time is worth for procuring the house, getting renters, how much time you will spend hounding them to pay rent, how much it will take to redo the house when they move out, everything. Saving some on taxes should play a part in figuring out the profitability of it, but it shouldn't be the sole reason you get into a business like that.

  3. monkeymama Says:

    Actually I don't think it is a bad idea because you have the MEANS. If you can buy low and make the mortgage payments, regardless of rental income, then it is a very smart financial move.

    Anyway, from a tax standpoint, all the taxes and interest on 2 homes are tax deductible (even if you don't rent out the second). So I can clarify that.

    I agree though I wouldn't do it just for the tax deduction. That would be silly. You would be shelling out far more than you would be saving. BUT with the tax deduction it could be a much more lucrative investment for you than the average person. So I get that aspect.

    If you can pull the money from your house and pay cash, is probably best. They may treat it like an investment loan anyway. I am not sure how specific you have to be. At least if you pull it from your current home I would guess you can just say you want the equity and you don't have to specify as an investment loan. It may depend on the lender. I could be wrong too. But it seems if the collateral is your home... But just thinking to how many people borrowed hundreds of thousands of equity for vacation and new cars. Does anyone blink at that any more? Wink
    Likewise, if you are unsure what to do now, buy the second home and say it is for a second home. I don't think that would be considered an investment? Something to consider. People buy homes all the time and later rent them out. So would be the angle I would go for to keep it honest and get the best rates.

  4. ANonnyMouse Says:

    You mean it's not a good idea to pay $12,000 - 15,000 a year (mortgage, property taxes & insurance) in order to get a tax break/refund, etc. of $6,000?

    Who'da thunk that?

    @@

    please note the figures are hypothetical but the general principle is correct. You are never going to get a tax break that comes anywhere near what you shell out.

  5. Jerry Says:

    Renting is not for the weak... and finding good tenants can lead to headaches in and of itself, not even including the enormous frustrations of having BAD tenants! I suppose if you have the means, like MonkeyMama pointed out, then OK. But the costs of taxes and insurance are not to be overlooked, certainly. Good luck, whatever you decide to do!
    Jerry

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