| When Paul J. Hesse, Major, USAF (Ret), found | | | | mortgage and property taxes are deductible |
| himself manhandling scores of garbage bags | | | | similar to a person's primary residence." Such a |
| containing the remaining possessions of a former | | | | second home cannot be rented out for more |
| renter he'd evicted from Hesse's family home, he | | | | than 14 days a year. |
| began to rethink the decisions of the last few | | | | Plan for Tax Issues if you Sell: A primary |
| years. | | | | residence you live in for two of the five years |
| It had seemed a good idea to keep the home | | | | immediately preceding the sale qualifies for a |
| just north of Cincinnati when Hesse received PCS | | | | $500,000 exemption on income taxes ($250,000 |
| orders for a base 1500 miles away. He'd had good | | | | for single filers), says Dyer. However, you can |
| tenants for two years, but then he hired a local | | | | move back into a rental property, re-convert it to |
| real estate agent in 2002 to serve as property | | | | a principal residence and sell it after the proper |
| manager for new tenants. | | | | holding period (two out of the preceding five |
| Bad tenants, and a bad property manager who | | | | years from the close of escrow on the original |
| didn't know how to evict them, resulted in the | | | | sale.) Thus you can requalify the property for |
| bad day for Hesse who thus found himself | | | | exemption, though you must pay depreciation |
| pitching the garbage bags, one by one, out his | | | | recapture taxes at a flat 25% on properties if the |
| front door. | | | | depreciation is taken or allowed after May 6, 1997. |
| He's returning this year to retire in that home. So | | | | Repair or Improvement? "In the case of a rental, |
| what did this long-distance owner of property | | | | all ordinary and necessary expenses to maintain |
| learn? "Both my successes and failures came | | | | the home as a rental are deductible to offset the |
| down to whether or not I did my homework, | | | | rent income," says Shaw. "Do not confuse |
| whether I was managing it myself or having | | | | improvements as expenses as they are subject |
| someone else do it," Hesse concludes. "It's not | | | | to depreciation and the rules that apply to |
| about managing property but about managing | | | | depreciable assets." |
| people." | | | | Passive or non-passive? "If a person manages the |
| Not everyone plans to return to live in the house | | | | rental property themselves, they have normal |
| they leave behind after a PCS. At one time, | | | | income from a non-passive activity," says Shaw. |
| Desley Sant Parker, Commander USN (Ret.) and | | | | "Should they choose to have a management |
| husband Brance James Parker, Captain, USN (Ret.) | | | | company handle matters for them, they take a |
| owned a primary residence and three rentals. | | | | passive role. Thus, they have passive income or |
| Selling one of their rentals, too small for the | | | | loss. A non-passive activity will be allowed to be |
| dream retirement home they wanted, provided | | | | deducted.... but passive activities that create a loss |
| them with the cash for a second vacation home | | | | are only used to offset passive income. " |
| rental. "If you can only manage to have one | | | | Just rewards |
| rental," says Desley Parker, a Florida-based | | | | Long distance home ownership can be a powerful |
| Certified Success Coach, "keep one in the area | | | | tool for building wealth, given the ideal of low |
| you may want to retire to. Even if it is not the | | | | vacancy rates and maintenance costs. |
| home you retire to, it will provide you a foot in | | | | Albuquerque resident Senior Master Sergeant |
| the market." | | | | Shannon Roberts, USAF (Ret.), for instance, has |
| Unlike Hesse, the Parkers liked a hands-on | | | | successfully juggled rent properties through his |
| experience that saved money and allowed | | | | career, with the only regret that he wishes he'd |
| "relationship building" with tenants and continued | | | | started earlier. Dyer says that some retired |
| connection with the community. | | | | officers accumulate 6-8 properties during a typical |
| Dollars and Sense | | | | military career and can gain considerable equity |
| Do it yourself from afar (either hands-on or | | | | while letting someone else make the mortgage |
| through a friend or family member) or hire out | | | | payments. |
| management? The typical 10% paid to a property | | | | Property Abroad and Snowbird Issues |
| manager would seem a simple calculation -- until | | | | What if your rental is overseas? In terms of |
| you factor in the requirement of some | | | | income, Shaw says there's no significant |
| management companies of a minimum amount of | | | | difference because you'll probably hire a property |
| capital to remain on deposit for unexpected | | | | manager who'll send you net proceeds that will be |
| repairs, bringing initial costs up even higher. | | | | taxable. |
| Philip Dyer calls those surprise factors, which also | | | | Dyer says snowbirds--those who legitimately |
| include unplanned vacancies and setting rental | | | | spend equal time in two domestic locations-can |
| rates too low, the "alligators" that slowly eat a | | | | choose one location (usually the one with the best |
| landlord one bite at a time. Major Russ Perkins, US | | | | tax structure, such as Florida or Texas) as the |
| Army IN, Active duty, who has owned several | | | | domicile state to keep more earnings from |
| rentals, advocates "counting the cost" ahead of | | | | pensions and Social Security. "By changing the |
| time and setting aside a minimum of six months' | | | | domicile state to one with no state income tax, |
| mortgage payments to stave off such alligators. | | | | they can save significant amounts on state |
| But there's money to be made on residential real | | | | income taxes, since most part-year resident tax |
| estate. Philip Dyer, MOAA's deputy director for | | | | laws only applied to earned income, not |
| financial education, points out: "Any loss - real or | | | | retirement/pension plans," says Dyer. |
| paper - taken on the property is an 'above the | | | | Shaw, however, offers a note of warning: "I have |
| line' deduction on personal income taxes, which | | | | seen states try to go after snowbirds in an |
| directly affects a taxpayer's adjusted gross | | | | attempt to establish domicile. Theory is correct, |
| income (AGI). You can deduct mortgage interest, | | | | but make sure you have a strong position that |
| property taxes, repairs, management fees and | | | | the nontaxable state. . .is your true domicile." |
| two annual visits to the property for inspection | | | | Some snowbirds skirt the whole distance issue |
| from your gross rental receipts." | | | | with recreational vehicles, which usually qualify as |
| Dyer and California-based David A. Shaw (who | | | | second residences. For instance, Arnold L. Payne |
| served in the USAF, Space Command, before | | | | (Technical Sergeant, USAF Ret. E-6), and wife |
| becoming an a tax expert known as an Enrolled | | | | Mary Ann "go anywhere we want," says Mary |
| Agent, licensed by the federal government to | | | | Ann. Their long-distance home maintenance issues |
| represent taxpayers before the IRS) give the | | | | of their primary home in Lynnewood, Washington, |
| following military-specific pointers about | | | | are handled by their daughter, while their "vacation |
| long-distance home ownership: | | | | home" is located anywhere its wheels will take it, |
| Go with a plan. Shaw points out that it matters if | | | | with a new picture-window view every day if |
| a house is a primary residence or intended to be | | | | they wish. |
| such for retirement, because a rental property will | | | | Advice You Can Use |
| always be depreciated (allowed or allowable by | | | | Homework, homework: Investigate a property |
| the IRC, whether or not it's taken.) "The loss | | | | manager. Investigate prospective tenants. Don't |
| created by the rental activity, including | | | | sign a contract you can't understand with a |
| depreciation, is limited to $25,000 and is subject to | | | | property manager. And don't issue a renter's |
| a phase out when AGI is between $100 - | | | | contract you can't understand. |
| $150,000," says Shaw, who also cautions that not | | | | If possible, buy near a base where renters will be |
| all repairs or improvements are fully deductible the | | | | military. Points out Rob Harol, product manager |
| year of the expense, and may be subject to | | | | for financial services at , you have recourse |
| state laws that may differ from federal ones. | | | | resources: "You get a little more peace of mind |
| State your state. "If the home is located in a | | | | than the average landlord if they are renting to |
| state in which the officer has no income from | | | | fellow military members." |
| other than the rents," says Shaw, "he may still | | | | Don't buy a "quaint" house. Buy a practical, |
| have to file an income tax return with the state | | | | three-bedroom, two-bath house that rents quickly |
| the home is located in [resulting in] a tax liability in | | | | and will sell quickly if you need it to. |
| not only the state of his home of record, but the | | | | Consider a home warranty company. For a small |
| state in which the property is located as well." | | | | monthly fee (and sometimes a nominal trip |
| Two state returns may be necessary for | | | | charge) they'll repair any appliance and/or system |
| "snowbirds" who don't rent out a second home, | | | | they've warranted. |
| but use it as a residence part of the year. | | | | Get over how it looks: Remember, you can |
| However, if it is treated as a second home or | | | | always repaint or put in new carpet if and when |
| vacation home, says Shaw, "the interest on the | | | | you decide to live in it again. |