Ive posted a few threads to spur on disscuission about adding on to my current home in Milwaukee.
At this point Ive come up three possible scenarios:
1. Add a second story; most costly (almost prohibitively) and would get us exactly what we want.
2. Add a smaller single story addition at grade; we would gain needed living space but would not be a long term solution as our family is growing. I envision staying 2-5 yrs as opposed to selling this year/ adding a second story.
3. Selling immeadiately; not my first choice as I have over-spent on improvements (new bathroom, furnace, roof, etc.). I would do al ittle better than break even but would get next to nothing for considerable sweat equity.
And… I’d like to hear thoughts on yet another idea:
4. Proceed with a second story addition but with the assumption that it would become a rental unit. I could realistically get 2 beds, 1 bath and kitchen open to a larger living room. about 1000 sq ft. I’m in a desirable neighborhhood with about 25-30% rentals so covering the mortgage/home equity that would pay for it is realistic. I would probably live in one unit (lower because of baby on the way) and rent the other depending on wich would bring more income and eventually move out all together.
Has anyone had expirience in converting a single family into a multi family? What kind of considerations would need to be addressed?
-J
Replies
This is an idea which I'm constantly toying with. One serious consideration is that a duplex doesn't qualify for IRS capital gains credits in the same way as a single family home. I don't know the details but going duplex is not the best way to take advantage of that very worthwhile tax break.
One of the things I need clarification on is the possibility of claiming construction expenses as a business cost. I know that the percentage of the building (second unit) and income that it generates would be a business cost/ income for tax purposes. I'll need to do some investigating on this as a part of my research.
I suppose I could sell the entire property to "my property managment company" and pay rent to myself for the unit that I inhaibt. That way all my improvements for both units would be eligible for tax credits. Any one have knowledge of how to go about this?
-Joe
Of course you deduct all improvements from the sale price of the home, before applying the $250K or $500K capital gains credit.
The other questions you pose are of interest to me too. I've never been a landlord so a simple primer on that subject would be very welcome.
I suppose I could sell the entire property to "my property managment company" and pay rent to myself for the unit that I inhaibt. That way all my improvements for both units would be eligible for tax credits. Any one have knowledge of how to go about this?
I'd speak to an accountant about this to make sure you don't lose some benefits, like being able to deduct your mortgage interest and property taxes.
Actually it is better to be able to deduct taxes and mortage on sch E. You get full credit there.And you have still get the standard deduction. On personal personal return the effective deduction is only for the amout over the standard deduction.However, the big loss is capital gains exclusion for personal residences.And this is outside by expericence, but I am not sure that there is much in the way of tax credits that would be a plus.Depreciation and then recapture might help slightly in most cases, but in some (lower tax bracket) it can really bite you..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
"One of the things I need clarification on is the possibility of claiming construction expenses as a business cost."Unless you are running a motel (daily rental with maid service) or have a 1000 units and it is your only income then it isn't a business, it is an investment and passive income.But even if it was a buisness you can not deduct the cost of construction. That is a capital expense and it get DEPRECIATED. I am not sure of the numbers, but I think that it is 37 years for residential property.On the rental property you have the rental income and deduct the the depreciate, mortage interest, taxes, and repairs. New improvements are capitalized and depreciated.When you sell the depreciated is recaptured at a 25% tax rate. A gain, after accounting for depreciate is taxed as capital gains.You really will need a GOOD tax pro to set this up if you decide to do it. There will be a lot of issues in terms of proportional the taxes, cost basis, and interest between the personal residence and the rental unit.
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Joe,
The first thing you would need to do is to verify that your lot is zoned for duplex or multi-unit structures. There is no reason to assume that you are even if there is a duplex next door. Especially in older neighborhoods these are varianced on a lot-by-lot basis. Sometimes getting the variance is a snap, sometimes.... It may take longer to get the variance than to build the addition.
You also mentioned baby on the way. Can you gaurantee to your DW that everything will be done, period, in time? Construction around pregnant women can be dicey at the best of times (BEEN there, DONE that - 3 times!!LOL).
Just my half cent worth,
Good Luck
There might be possible zoning restrictions for changing your house into a duplex. Also, making a second story duplex means a dedicated stairs to it (here, at least, that entry would need to be covered/enclosed, adding to your costs). And if you've got a baby on the way, this might not be the best time to start any major construction projects (although i would be remiss to say that, unfortunately, no time will be a good time for the next 18 or so years). <g>
Did the live in one side/rent out the other for a few years. It is a good way to get some additional income. And you can write off part of your tool purchases as a business expense. But it also gets old after awhile. You're responsible for fixing/maintaining everything. There's noise from adjoining walls. Trying to find decent tenants is a pain. And don't forget that some of that rent money goes back to Uncle Sam. My observations:
Option #1: a lot of cost and effort during a difficult personal time (with a baby on the way your life will already be hard enough)
Option #2: somewhat better
Option #3: 1) 'sweat equity' rarely pays off in such situations so forget recouping it, and 2) the easiest option (although from personal experience having kids does not automatically = larger house)
Option #4: if you're intent on doing the duplex thing, take some time to find an existing one that's to your liking (otherwise you're only facing option 1, only more so).
All,
Thanks for the replies so far. First off none of the scenarios that involve staying in the house would support alterations/ additions begining before next summer.
Ive got way too much going on personally right now to even think about it.
I dont believe there would be any issue with zoning restictions as my property is zoned for multi family currently, however, I have no idea what would be entailed in getting it aproved by the city.
Dedicated stairs are not a major issue either, in fact if we were to go up, the plans I have currently have the stairs built out side the existing building envelope as none exist to the attic. New foundation and and all... It would be more cost effective to do an exterior covered entry directly to the second floor unit anyway...that way it would not be conditioned space and existing [beefed up] first floor framing could be uttilized.
Finding a decent tenant... well I wont argue that being a landlord is a pain in the @$$ at times and I have [second hand] expirience with my uncle owning multiple properties. It is definitely a major consideration and DW will have to be OK with it as well. The plan would be to stay for a limited durration as an owner/ inhabitant, eventually rent both units and move out. I wouldnt want to live in a multi familty for long as we like our privacy.
Im confident the noise transfer would be minimal as the design that Im kicking around would entail wood floor joists with a good amount insulation.
Your comment on kids not equating to larger house is a welcome one...but the two bedroom/ one bath/ limited storage does equate to some kind of upgrade in the future. Since finishing a new bathroom adjacent to the old one, the storage part of the equation will be getting better in the near future as the old bath becomes a large walk in and hall linen closet. Still more sweat equity to pour into that one! In fact I could possibly live with the small house (as long as it has adequte storage) but the DW still has [illusions currently] of granduer. I guess I may be out of touch with reality as much as she is but I like the idea of starting my slum lord empire by converting to a duplex.
If youve followed any of my other threads, Im definitely a planner... that is I will beat this to death untill I'm comfortable with the plan.
I am most interested in anyone who has converted a single to a duplex... any perspective? Im also curious if anyone owns multiple rentals and about the logistics of setting up a business ownership of the house.
Here's a thought to go with option #4.
First, read the thread "Remodeling Reversibility".
A talk with a tax professional will be necessary to determine if you are still eligible for the huge capital gains exclusion if you convert to a duplex and sell it as a personal residence/rental unit. If you do move out and keep it as a full rental duplex while you have another personal residence you will lose all the exclusion.
Back to the first:
Consider going through with the conversion to duplex with a second floor rental, but, modify your plans to enclude an interior vestibule and stairway up. Configure your planned second floor so that the kitchen can be eliminated at a future date and converted to another bedroom or split to become walk-in closet additions for the two upstairs bedrooms or another bath and walk-in for the upstairs living room which could be converted to a third bedroom. Place the plumbing accordingly.
To recapture the entire capital gains exclusion for a primary residence, and to accomodate a growing family a few years down the road, revert the duplex to a single family home by removing the vestibule and replacing it with a foyer and revamping the second floor.
It takes two years as a primary residence to qualify for the capital gains benefit and in that time if you still contemplate moving I think a single family home, recently and extensively remodeled, would be an easier, more profitable sale than a dupex rental.
Also, calculate the value and desirability of the neighborhood. You did say it was excellent? Appreciation/equity should be better when you are ready.