Avoid Capital Gains on Rental
Don't let the tax tail wag the investment dog. There is risk in exchanging this (known) property for another (unknown) property. That risk may be more than $9000 worth of risk. Tax considerations are important, but most important is that your investments make money. If you intend to continue as a landlord, you had better be sure you are finding a better deal elsewhere if you are going to trade this property up. I should also mention that you have a 5 year window in which you need to have lived in the home for 2 years. You have time and might be able to sell for a higher price if you wait a little longer. Your question is best asked of a tax expert, not random people on the internet. Such an expert will help you ask the right questions.  For example you did not point out the country or state in which you live.  That matters.   First point is that you will not pay tax on 60K, its expensive to transact real estate, so your net proceeds will be closer to 40K.  Also you can probably the deduct the costs of improvements. You implied that you really like this rental property.  If that is the case, why would you sell...ever?  This home could be a central part of your financial independence plan.  So keep it until you die.  IIRC when it passes to your heirs, a new cost basis is formed thereby not passing the tax burden onto them. (Assuming the property is located in the US.) While it may not be your preferred outcome, and doesn't eliminate the income, in the event you find yourself in the path described here you have a way to defer gains to the future. but I would then want to buy another house as a rental If you sell this house and buy another investment property (within strict time windows: 45 days to written contract and closed in 180 days),  you can transfer your basis and defer your gains via what is called a 1031 like-kind exchange "Just brainstorming here, but my gut feeling is it should be possible to sell your home to yourself with the sole purpose of resetting your basis. Taken at face value it feels illegal, but since I think we all would agree that you could sell your house to a third party and purchase the identical house next door for the same price (thus resetting your basis), why can't you purchase the same home right back? If one is legal, it seems odd for the other not to be. That being said, I have no idea how to legally do it. Perhaps you truly need a third party to step in which you sell it to, and then buy it back from them sometime in the future. Or perhaps you could start an LLC and have it purchase your home from you. Either way, I highly suggest finding an expert real estate attorney/accountant before attempting this, and don't be surprised if you get multiple opposite opinions. I suspect this is a gray area which will highly depend on how tax ""aggressive"" you are willing to be." What you are looking for is a 1031 exchange. https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031 Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free. You may also sell your house for bitcoin and record the sales price on the deed with an equal or lesser amount that you bought it for.
"This is a great question, considering that all of your expenses including PITA, Maintenance, etc. are paid by a tenant, your cash flow is $0. Most people would stop and assume your investment is not performing and your only chance at making money is through appreciation. Your question eliminates appreciation so here are the returns you would get on your investment. The math will probably surprise many that you are actually earning a return on your money.   Annual Return = [((Future Value)/(Initial Investment))^((Periods per Year)/(Number of Periods) -1]*100 % 5.51% = [($200,000/$40,000)^(12/360)-1]*100 % As Chris Rea commented: The subtlety that some would miss is that while ""income covers expenses exactly"", embedded in the ""expenses"" is actually a repayment of the loan principal (and technically, that's not an ""expense"") so not all of the income is ""lost"" covering the ""expenses"". That repayment of principal portion of the rental income constitutes the return on the original capital invested." This will be a complex issue and you will need to sit down with a professional to work through the issues: When the house was put up for rent the initial year tax forms should have required that the value of the house/property be calculated. This number was then used for depreciation of the house. This was made more complex based on any capital improvements. If the house wasn't the first he owned, then capital gains might have been rolled over from previous houses which adds a layer of complexity.  Any capital improvements while the house was a rental will also have to be resolved because those were also depreciated since they were placed in service. The deprecation will be recaptured and will be a part of the calculation. You have nowhere near enough info to make a calculation at this time. "You are assuming 100% occupancy and 100% rent collection.  This is unrealistic.  You could get lucky and find that long term tenant with great credit that always pays their bills... but in reality that person usually buys a home they do not rent long term.  So you will need to be prepared for periods of no renters and periods of non payment.  The expenses here I would expect could wipe out more than you can make in ""profit"" based on your numbers. Have you checked to find out what the insurance on a rental property is?  I am guessing it will go up probably 200-500 a year possibly more depending on coverage.  You will need a different type of insurance for rental property. Have you checked with your mortgage provider to make sure that you can convert to a rental property?   Some mortgages (mine is one) restrict the use of the home from being a rental property.  You may be required to refinance your home which could cost you more, in addition if you are under water it will be hard to find a new financier willing to write that mortgage with anything like reasonable terms. You are correct you would be taking on a new expense in rental.  It is non deductible, and the IRS knows this well.   As Littleadv's answer stated you can deduct some expenses from your rental property. I am not sure that you will have a net wash or loss when you add those expenses.  If you do then you have a problem since you have a business losing money.  This does not even address the headaches that come with being a landlord. By my quick calculations if you want to break even your rental property should be about 2175/Month. This accounts for 80% occupancy and 80% rental payment.  If you get better than that you should make a bit of a profit... dont worry im sure the house will find a way to reclaim it." "I would say similar rules apply in the US.  If you have a net loss from rental property, you certainly can claim that loss against your personal income. There are various rules around this though that make it a bit less clear cut.  If you are a ""real estate professional"", which basicly means you spend at least 750 hours per year working on your rental properties (or related activities), then all losses are deductible against any other ordinary income you have. If you aren't a ""real estate professional"", then your rental income is considered a ""passive activity"" and losses you can count against regular income are limited to $25,000 per year (with a carry-forward provision) and begin to phase out entirely if your income is between $100,000 and $150,000. So, the law here is structured to allow most small-time investors to take rental real estate losses against their ordinary income, but the income phase-out provision is designed to prevent the wealthy from using rental property losses to avoid taxation." "From Rich Dad, Poor Dad. 3 Major Things: With rental real estate, in addition to mortgage interest, you also deduct property taxes, and must claim depreciation (cost of house / 27.5 years) Business Expenses. For example, buy a yacht and put it in a charter fleet. Deduct interest on the loan, depreciation of the asset, property taxes, upkeep of the boat. Your ""business"" earns profit from chartering the boat, which if I recall correctly is taxed at a lower rate. You get to go sailing for free. Then there was the concept of subdividing the businesses. If you own a restaurant, create another business to own the property, and the equipment used in the company. Then lease the equipment and rent the land to the restaurant. Now admittedly I thought this was like the Daylight Savings plan of tax avoidance, I mean now aren't you essentially having two companies paying half the taxes. I am sure there are well paid CPAs that make the math happen, perhaps using insurance plans.. Perhaps each business funds a ""whole life"" insurance account, and contributes vast amounts into that. Then you take a loan from your insurance account. Loans of course are not income, so not taxed. The third way is to create your own bank. Banks are required to have reserves of 9%. Meaning if I have $100 dollars, the FDIA allows me to loan $1,111. I then charge you 20% interest, or $222/yr. Now how much can I loan?  ...well you can see how profitable that is. Sure you pay taxes, but when you print your own money who cares? Most of this is just gleamed from books, and government publications, but that was my general understanding of it. Feel free to correct the finer points." Buying individual/small basket of high dividend shares is exposing you to 50%+ and very fast potential downswings in capital/margin calls. There is no free lunch in returns in this respect: nothing that pays enough to help you pay your mortgage at a high rate won’t expose you to a lot of potential volatility. Main issue here looks like you have very poorly performing rental investments you should consider selling or switching up rental usage/how you rent them (moving to shorter term, higher yield lets, ditching any agents/handymen that are taking up capital/try and refinance to lower mortgage rates etc etc). Trying to use leveraged stock returns to pay for poorly performing housing investments is like spraying gasoline all over a fire. Fixing the actual issue in hand first is virtually always the best course of action in these scenarios. As a landlord for 14 years with 10 properties, I can give a few pointers: be able and skilled enough to perform the majority of maintenance because this is your biggest expense otherwise.  it will shock you how much maintenance rental units require. don't invest in real estate where the locality/state favors the tenant (e.g., New York City) in disputes.  A great state is Florida where you can have someone evicted very quickly. require a minimum credit score of 620 for all tenants over 21.  This seems to be the magic number that keeps most of the nightmare tenants out makes sure they have a job nearby that pays at least three times their annual rent every renewal, adjust your tenant's rent to be approximately 5% less than going rates in your area.  Use Zillow as a guide.  Keeping just below market rates keeps tenants from moving to cheaper options. do not rent to anyone under 30 and single.  Trust me trust me trust me.  you can't legally do this officially, but do it while offering another acceptable reason for rejection; there's always something you could say that's legitimate (bad credit, or chose another tenant, etc.) charge a 5% late fee starting 10 days after the rent is due.  20 days late, file for eviction to let the tenant know you mean business. Don't sink yourself too much in debt, put enough money down so that you start profitable.  I made the mistake of burying myself and I haven't barely been able to breathe for the entire 14 years.  It's just now finally coming into profitability. Don't get adjustable rate or balloon loans under any circumstances.  Fixed 30 only.  You can pay it down in 20 years and get the same benefits as if you got a fixed 20, but you will want the option of paying less some months so get the 30 and treat it like a 20. don't even try to find your own tenants.  Use a realtor and take the 10% cost hit.  They actually save you money because they can show your place to a lot more prospective tenants and it will be rented much sooner.  Empty place = empty wallet.  Also, block out the part of the realtor's agreement-to-lease where it states they keep getting the 10% every year thereafter.  Most realtors will go along with this just to get the first year, but if they don't, find another realtor. buy all in the same community if you can, then you can use the same vendor list, the same lease agreement, the same realtor, the same documentation, spreadsheets, etc.  Much much easier to have everything a clone.  They say don't put all your eggs in one basket, but the reality is, running a bunch of properties is a lot of work, and the more similar they are, the more you can duplicate your work for free.  That's worth a lot more day-to-day than the remote chance your entire community goes up in flames Property in general tends to go up in value.  That's one advantage you won't get if you rent. "The trade-off seems to be quite simple: ""How much are you going to get if you sell it"" against ""How much are you going to get if you rent it out"". Several people already hinted that the rental revenue may be optimistic, I don't have anything to add to this, but keep in mind that if someone pays 45k for your apartment, the net gains for you will likely be lower as well. Another consideration would be that the value of your apartment can change, if you expect it to rise steadily you may want to think twice before selling. Now, assuming you have calculated your numbers properly, and a near 0% opportunity cost: 45,000 right now 3,200 per year The given numbers imply a return on investment of 14 years, or 7.1%. Personal conclusion: I would be surprised if you can actually get a 3.2k expected net profit for an apartment that rents out at 6k per year, but if you are confident the reward seems to be quite nice." "If you sell an asset for more than you paid for it, the excess amount realized is called a capital gain and is generally considered a form of income for tax purposes. Generally, one pays income tax on realized capital gains, unless the sale is exempt—such as the sale of one's principal residence. Capital gains tax can also be avoided or deferred by holding assets in a tax-advantaged investment account like a TFSA or RRSP. When taxable, the effective income tax rate on capital gains income is half the normal rate due to the capital gains inclusion rate. Capital gains income is generally not considered to be employment, ""earned"", or ""working"" income. However, individuals who, say, trade stocks frequently and earn a substantial portion of their income that way may have their gains considered employment income and subject to regular income tax instead of the better rate. I suggest you contact Service Canada and ask them about the impact of a one-time sale of personal property that would result in a realized capital gain. While you would owe income tax on the capital gain, it might not have any impact on your disability benefits, because it would not be earned or employment income. You should also check with your private insurer; they may also consider the sale a capital gain and not employment income, however, only they would be able to tell you for sure whether it would have any possible effect on your benefits." I am not going to argue the merits of investing in real estate (I am a fan I think it is a great idea when done right).  I will assume you have done your due diligence and your numbers are correct, so let's go through your questions point by point. What would be the type of taxes I should expect?  NONE. You are a real estate investor and the US government loves you. Everything is tax deductible and odds are your investment properties will actually manage to shelter some of your W2(day job) income and you will pay less taxes on that too.  Obviously I am exaggerating slightly find a CPA (certified public accountant) that is familiar with real estate, but here are a few examples. I am not a tax professional but hopefully this gives you an idea of what sort of tax benifits you can expect.   How is Insurance cost calculated?  Best advice I have call a few insurance firms and ask them.  You will need landlord insurance make sure you are covered if a tenant gets hurt or burns down your property. You can expect to pay 15%-20% more for landlord insurance than regular insurance (100$/month is not a bad number to just plug in when running numbers its probably high).  Also your lease should require tenants to have renters insurance to help protect you. Have a liability conversation with a lawyer and think about LLCs.   How is the house price increase going to act as another source of income?  Appreciation can be another source of income but it is not really that useful in your scenario.  It is not liquid you will not realize it until you sell the property and then you have to pay capital gains and depreciation recapture on it.  There are methods to get access to the gains on the property without paying taxes.  This is done by leveraging the property, you get the equity but it is not counted as capital gains since you have to pay it back a mortgage or home equity lines of credit (HELOC) are examples of this.  I am not recommending these just making sure you are aware of your options. Please let me know if I am calculating anything wrong but my projection for one year is about $8.4k per house (assuming no maintenance is needed) I would say you estimated profit is on the high side.  Not being involved in your market it will be a wild guess but I would expect you to realize cash-flow per house per year of closer to $7,000.  Maybe even lower given your inexperience.  Some Costs you need to remember to account for: Taxes, Insurance, Vacancy, Repairs, CapEx, Property Management, Utilities, Lawn Care, Snow Removal, HOA Fees. All-in-all expect 50% or your rental income to be spent on the property.  If you do well you can be pleasantly surprised. You bought a rental property in 2001. Hopefully you paid fair value else other issues come into play.  Say you paid $120K. You said you have been taking depreciation, which for residential real estate is taken over 27.5 years, so you are about halfway through. Since you don't depreciate land, you may have taken a total $50K so far.  With no improvements, and no transaction costs, you have $50K in depreciation recapture, taxed at a maximum 25% (or your lower, marginal rate) and a cap gain of the 5-10K you mentioned. Either can be offset by losses you've been carrying forward if you suffered large stock losses at some point. You have some of the math right, but are missing a few things. Here's what I can offer - if I leave anything out, someone please expand or clarify. Rental income can be reduced by mortgage interest and maintenance costs (as you mentioned), but also by property tax payments, association fees, insurance costs, landlord expenses, and depreciation. Note that if you don't live in the property for 3 years, you'll have to pay capital gains tax if/when you sell the house. You can live in it again for 2 of the last 5 years to avoid this. Many people recommend only assuming you will get 10 months of rental income a year, to account for transitions between tenants, difficult in finding new tenants, and the occasional deadbeat tenant. This also adds a buffer for unexpected problems you need to fix in the house. If you can't at least break even on 10 months of income a year, consider the risk. I think there are also some cases where you need to repay depreciation amounts that you have deducted, but I don't know the details. Renting out a house can be fun and profitable, but it's very far from a sure thing. I'd always recommend preparation and caution, and of course talking to professionals about the finances, accounting, and lease-writing. Good luck! There's a couple issues to consider: When you sell your primary home, the IRS gives you a $500k exemption (married, filing jointly) on gain.  If you decide not to sell your current house now, and you subsequently fall outside the ownership/use tests, then you may owe taxes on any gains when you sell the house. Rather than being concerned about your net debt, you should be concerned about your monthly debt payments.  Generally speaking, you cannot have debt payments of more than 36% of your monthly income.  If you can secure a renter for your current property, then you may be able to reach this ratio for your next (third) property. Also, only 75% of your expected monthly rental income is considered for calculating your 36% number. (This is not an exhaustive list of risks you expose yourself to). The largest risk is if you or your spouse find yourself without income (e.g. lost job, accident/injury, no renter), then you may be hurting to make your monthly debt payments.   You will need to be confident that you can pay all your debts.  A good rule that I hear is having the ability to pay 6 months worth of debt.  This may not necessarily mean having 6 months worth of cash on hand, but access to that money through personal lines of credit, borrowing against assets, selling stocks/investments, etc. You also want to make sure that your insurance policies fully cover you in the event that a tenant sues you, damages property, etc.  You also don't want to face a situation where you are sued because of discrimination.  Hiring a property management company to take care of these things may be a good peace-of-mind. I wrote this in another thread but is also applicable here. In general people make some key mistakes with property: Not factoring in depreciation properly. Houses are perpetually falling down, and if you are renting them perpetually being trashed by the tenants as well - particularly in bad areas. Accurate depreciation costs can often run in the 5-20% range per year depending on the property/area. Add insurance to this as well or be prepared to lose the whole thing in a disaster. Related to 1), they take the index price of house price rises as something they can achieve, when in reality a lot of the house price 'rise' is just everyone having to spend a lot of money keeping them standing up. No investor can actually track a house price graph due to 1) so be careful to make reasonable assumptions about actual achievable future growth (in your example, they could well be lagging inflation/barely growing if you are not pricing in upkeep and depreciation properly). Failure to price in the huge transaction costs (often 5%+ per sale) and capital gains/other taxes (depends on the exact tax structure where you are). These add up very fast if you are buying and selling at all frequently. Costs in either time or fees to real estate rental agents. Having to fill, check, evict, fix and maintain rental properties is a lot more work than most people realise, and you either have to pay this in your own time or someone else’s. Again, has to be factored in. Liquidity issues. Selling houses in down markets is very, very hard. They are not like stocks where they can be moved quickly. Houses can often sit on the market for years before sale if you are not prepared to take low prices. As the bank owns your house if you fail to pay the mortgage (rents collapse, loss of job etc) they can force you to fire sale it leaving you in a whole world of pain depending on the exact legal system (negative equity etc). These factors are generally correlated if you work in the same cities you are buying in so quite a lot of potential long tail risk if the regional economy collapses. Finally, if you’re young they can tie you to areas where your earnings potential is limited. Renting can be immensely beneficial early on in a career as it gives you huge freedom to up sticks and leave fast when new opportunities arise. Locking yourself into 20 yr+ contracts/landlord activities when young can be hugely inhibiting to your earnings potential. Without more details on the exact legal framework, area, house type etc it’s hard to give more specific advise, but in general you need a very large margin of safety with property due to all of the above, so if the numbers you’re running are coming out close (and they are here), it’s probably not worth it, and you’re better of sticking with more hands off investments like stocks and bonds.