Rental Investment Property

Asked by Sash, New Jersey Wed Oct 17, 2007

OK this is a current situation. I am single and currently renting a house and pays monthly $550 rent. Apparantly, 2 months back, I've purchased a 2 br townhome ( my first home) in NJ to live in but since then I've decided to use that house as a rental investment. I've paid 20% downpayment, and my monthly mortgage including property taxes comes down to $2000 $210 HOA fees. If i would have lived in this house I bought, I would have saved around $600 on monthly mortgage payment from my income taxes.
My questions are
1 Can I rent this property out since it's my first home ?
2. If I rent this property out for let says $1700-$1800 rent, that takes care of my monthly mortgage and $300 of $550 of monthly property taxes , would I still be able to save my taxes on the mortgage payments I make every month and if yes, how much based on the numbers I've written.
3.Do i have to pay taxes on capital gains if i sell it since I used it as a rental property and never lived in it.

Thanks.

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6
Jim Walker, Agent, Carmichael, CA
Sat Oct 20, 2007
Sash,
The opinion anyone here on Trulia gives you on what the lender might have a problem with is just an opinion.
Apparently you signed an application that told the bank you wer planning to occupy the home. Lenders consider that owner occupation of the home will occur within about 60 days of the close of escrow.
If you did not intend to occupy until two or three years from now, your application should have stated that you were purchasing for investment purposes. It would have been correctly undewritten and correctly priced for the increased risk that an investor owned home carries which is worse than the risk of default that an owner occupied home has.

I can list possibilities, but I will not predict the likelihood of any of them.
1. Possibility #1 - Lender thinks you sugared them, but as long as they are getting their payments on time they leave you alone.
2. Possibility #2 - Lender realizes your original intent to occupy was sincere and changes in your circumstances have triggered a change in occupancy plans. - Bank leaves you alone as long as you make payments on time.
3 Possibility #3 - Bank auditors decide to crack down on "lender fraud" - Bank goes after you even though payments are made on time.
4. Possibility #4 - At some point you struggle to make payments and find yourself in arrears. - Bank which was seemingly acquiescent about the whole investor / owner occupancy situation decides to crack down.
5. Possibility #5 - Bank sells loan to new lender who treats matter entirely differently than bank #1 did.

I continue to believe that you are innocent of "lender fraud' if you sincerely had planned to move in to the new house when you signed your loan application all the way through the time that you closed escrow on the house. However, there are thousands of fraudulent buyers who deceived lenders and purchased homes fraudulently as owner occupants, in order to get a lower rate, and perhaps lower down payment, with no intention of occupying whatsoever. Because the fraud is so rampantly widespread, it seems an innocent person has to prove their innocence.

If a loan officer or realty agent participates or encourages an applicant to falsely state owner occupancy, then the agent or loan officer may also be accused of fraud, along with conspiracy and racketeering. You may wish to speak to attorney if you fear that are in any legal jeopardy.
0 votes
Sash, Home Buyer, New Jersey
Thu Oct 18, 2007
Thanks for your replies. Though it sounds like a weird question, however i'll still ask you people. Do you guys think, that the lender should have any problem, if i tell them in writing that for atleast couple of years or so I do not wish to occupy the house and want to rent it. I know I have to eventually ask question out to my lender but still asking for your personal opinions.

Thanks.
0 votes
Jim Walker, Agent, Carmichael, CA
Wed Oct 17, 2007
Sash, It was not "Lender Fraud" if you honestly and sincerely had planned to occupy the house, and that due to unforeseen personal, medical, or employment circumstances you have had to change your plans.
The bank might require you to prove your innocence.
0 votes
Linette Carr…, Agent, Wilmington, DE
Wed Oct 17, 2007
Very good question. It sounds like you need to sit down with an accountant and let him or her do the math for you. As a rental there are expenses that you can deduct that will help with your taxes. Remember that if you use this only as an investment property ( you have to live in a residence two of 5 years for it to not be an investment property) Taxes will be due when you sell the property unless you do a property exchange.
0 votes
Perry Hender…, Agent, Austin, TX
Wed Oct 17, 2007
Check in with a cpa. Barb Prashner is who I use.
0 votes
Mike Kelly A…, Agent, Santa Rosa, CA
Wed Oct 17, 2007
Talk to your friendly CPA/Accountant for the particulars of this question. If you represented to the lender you were going to be an "owner-occupant" on the townhome and have never lived in this property, then you have committed "lender fraud". This is not a good thing! Yes, you can rent out this property and yes, yo should be able to write off the interest payments on the loan, taxes, insurance, etc. You can also depreciate the property if you are holding for investment purposes. And when you sell you will not get any capital gains forgiveness since this is NOW a rental. I would sit down and let a CPA/Accountant fill in the blanks. You could always move into the townhouse for 2 years and then sell it with $250,000 (single person reporting) capital gains tax forgiveness. Check with your friendly lender regarding the lender fraud issues also!
0 votes
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