Dear PoP – How Much of a Pain is it to rent out a Condo?

Photo from PoPville flickr user Sanjay Suchak [x]

“Dear PoP,

I’m thinking of possibly renting out my studio condo in a couple years and possibly moving out to the Arlington or some other area where I can rent a bigger place for myself. I still have a mortgate on my condo. To be honest, the prospect of renting it out and all the potential IRS hassle that comes with it (depreciating the property, deducting condo dues, etc.) scares me a bit, possibly enough to avoid the whole process, especially since I’ve always done my own taxes. Is it less scary than it seems? Is a tax attorney necessary to handle this scenario or would TurboTax or similar software suffice? I envision my overall federal/DC income taxes going up if I make this move since mortgage interest/tax deductions would now be used to counteract rental income.”

For those who rent out your condo and/or house – how difficult is it re: taxes and in general? In your experiences would you recommend it or if it is feasible would suggest trying to sell first?

20 Comment

  • Arlington?! puke. sell your condo.

    • Finish this sentence:

      “If you can’t say something nice, then say _______ .”

      • Is Arlington that bad? I admit I rarely hang out in VA because DC has most of what I need + most of my friends / family are in MD / DC. Clarendon, Ballston, Rosslyn, Shirlington are nice, urban, walkable neighborhoods. What’s the worst thing about the neighborhoods – maybe they are a little generic.

  • I did this for a year when I moved to the area. I rented my townhouse in Richmond. It was really easy. My dad did my taxes the two years I had rental income (I rented it July to July). He had some help the first year from the IRS and the second year was super easy. I have never used Turbtax, but I would assume the program could help you. I would be more worried about the phone calls in the middle of the night that a pipe burst rather than the taxes.

  • From what I hear, DC laws are heavily skewed in favor of the tenant, so I would also make sure any lease it as ironclad as possible. Maybe have a lawyer look it over.

    As far as taxes, it’s probably worth it to have an accountant look it over, at least for the first year. After that you might be able to handle it yourself.

  • Get a basic business license!

    • Ditto.

      Also check to see if the condo association has rules about how many units can be rented out. Some associations do limit the number of units that are rental for fear that to many rentals lowers property value (or something like that)

  • it’s a lot easier than you think. i had an accountant do my taxes the first few years I rented a room in my condo out, but this year i tried turbo tax to save money and it was toatlly easy. honestly, the worst part about renting out your condo is not doing taxes but dealing with potentially crappy/irresponsible/late-paying tenants and being a landlord.

  • It’s not that difficult and totally worth it. It’s very important to fully evaluate potential tenants — I do credit checks and call past landlords for references. Also, make sure you verify income. Tax-wise it’s great because you can deduct depreciation as a non-cash expense, thereby reducing your income, and condo fees are fully deductable, which is not the case when you live in it. There’s a good chance you would show a loss because of that and you can deduct losses from your regular income up to a certain amount depending on how much you make. I use an accountant for taxes, which is only about $350 a year, because it gives me peace of mind that I’m doing everything correctly. The thing I find the most difficult is determining which expenses need to be depreciated and which can be taken right away. Good luck!

  • Hah, the taxes are the EASY part! You have to get licensed by the city (forms, lines, waiting and money), inspections (more waiting and possible repairs and/or upgrades), locate a tenant (Craigslist!), deal with tenant matters which ARE heavily weighted in their favor (hopefully you get a good one.)

    If you ever want to sell, THE TENANT HAS RIGHT OF FIRST REFUSAL. (If you just want to move back in there are more forms and a 90-day notification that needs to be given to the tenant.) It could work out great. But most likely it will be another layer of hassle when you do look to sell eventually.

    If you don’t want to do taxes, you may want to just sell. Now is not a bad time (like the last 2 years have been.)

    If you plan on having it for years to come as an investment, raise your bar for what a true hassle can be.

  • You should check with your condo association. Some condos have specific rules that you’ll need to know about.

    Also, if you plan on selling it in the future: it’s really hard to show an apartment to potential buyers if the tenant is still living there, because under DC law the tenant has a reasonable expectation of privacy. You’ll have a hard time getting anyone to buy your unit sight-unseen.

  • You can do it all yourself or pay accountants, realtors, mgmt companies to do it for you.

    You will lose the benefit of deducting interest and taxes on schedule A, but they will offset the rental income and depreciation could further shield income from taxes or create losses that will benefit you personally, assuming your AGI is under $150k. Another things to consider, if you haven’t lived in the place for 2 of the last 5 years when you go to sell it, you no longer qualify for the sale of your personal residence exclusion. Converting it back to a personal residence after a period of rental use, may require you to allocate gain b/w personal/rental use, subjecting you to tax (depreciation recapture) that otherwise wouldn’t have occurred for the sale of your personal residence (assuming you are single and the gain is less than $250k, likely with a studio, unless you bought it 40 yrs ago).

    I wouldn’t worry about it too much, if your timeframe is in a couple years, the rules are always changing.

  • Definitely agree with the statements that the taxes are the easy part. I didn’t find any difference in my taxes owed between taking the mortgage interest deduction (when i had housemates paying me rent) vs. the mortgage being a business expense (once I rented the whole house out). The rest of being a landlord is much more of a hassle – finding tenants, making repairs, etc. But if you can get good income from it or at least avoid selling your condo at a loss, it can be worth it.

  • I say sell it. Not because of taxes but because of DCs rent laws and you’re not helping the other condo owners if they want to sell theirs. If the building has too many units as rentals, it is difficult for buyers to get a mortgage. This is one of the reasons why I dislike condos.
    The pipes might not burst but the dishwasher may go kablooy.
    Your tenant may have a jerky roommate who blasts AC/DC at 2am and you get angry phone calls from your ex-neighbors.
    Your tenant might not pay rent on time for months on end.
    As others have said, taxes would be the least of your problems.

  • I do this, and I don’t find it all that difficult. My summary thoughts:

    * The DC taxes probably are the biggest pain if you live out of state and aren’t paying income taxes in DC, but once you’ve got that figured out, it’s a snap.
    * Finding tenants is pretty easy — use Craigslist. It will make a big difference what time of year you’re looking — spring, summer are great; Nov-Feb, not so much.
    * Maintenance can be a pain; decide before you do it whether you want to be an active landlord/manager or pay someone else to do it.
    * It’s worth it to have a comprehensive lease drawn up for you, or at least to get input from a lawyer friend. Leave nothing in doubt.
    * Screen the heck out of your tenants — call employers, former landlords, etc.. If you don’t feel comfortable with them, don’t rent to them. (If you want to avoid the pain of pulling their credit reports/privacy waivers, have them pull their own.) 80% of the work is finding a good tenant. Never, ever make a decision based on first come, first served.
    * It’s probably only worth doing if you’re going to get a rent that covers your mortgage by at least a few hundred bucks, after all the tax deductions, or if you feel like you’re going to take a bath selling the place. Can you really do that with a small studio?

  • I’m a small-scale landlord. ONe thing that sucks is DC considers you a business, no big deal $100 license a year. BUT when you sell, they tax you as a business and take an extra HUGE chunk — not f your actual profit but your book profit. Your accountant will depreciate the asset and you are going to show a profit. I lost money on a house a few years ago and to make it worse I had to pay the business profit of a few thousand dollars. Most landlords ignore the license and the sales tax.

    ALso, tenants have all kinds of crazy rights. Most are normal about it but there are real nutjobs who will use the ROFR law to hold up your sale and extort money from you if you try to sell. Just sell it. Like most “business” in DC, it’s totally not worth it. Hence the severe rental shortage.


    • Ugh, I didn’t know about that taxing of the sale as a business profit thing. I am going through a similar process as I prepare to finally abandon DC. Any idea what the tax rate is for selling a ‘business property’? Or where the documentation for that is on the OTR web site?

  • D-30 rate is 9.975%, but there are some exemption/allowance amounts that reduce your gain. If your rate is 8.5% as a resident (assuming your TI is over $40k), the difference is pretty nominal, especially considering you’ve shielded income from tax using depreciation and now DC wants to get their cut on the recapture.

  • A great location and price will make it easy to find a good tenant. You may even take a slight loss to have someone you can rely on. I for example am looking for a place for my niece who will move here in Sep. to teach school, as as a landlord myself, I would happily take care of property issues etc. for a good deal.

    Also think about your 5 year plan. As already mentioned, the 2 out of 5 year personal residence factor is important for tax considerations, but if that doesn’t work out, look into a “Starker exchange.” You sell your rental (technically “exchange” it) for another rental property and defer capital gains tax. Then after renting out the new property for a year, you move in and convert it to your personal residence.

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