by Claire
Warning: The below is a stream of consciousness! Have your coffee—or wine–before you read! 😉
I am guilty of looking way, WAY ahead and by July 21st, I’m already thinking about September 1. It is my nature and while I am getting better about being in the moment, the part of my brain that is thinks ahead is still there.
As I’ve explained in a past post–our housing situation is unique (I can’t really think of the right word and unique doesn’t quite hit it…but you’ll see what I mean). Steve owned a 3 bdrm, 2 bath home prior to our marriage that he lived in with his ex-wife and the boys. He bought the house in 2007 right before things took a downturn and he listed it for sale right around the same time that we met. With no great interest from potential buyers he decided to take it off the market and we lived in it from our marriage in December of 2009 until September 2010. There were several reasons for the move–we were driving 20-23 miles one way to work, the kids’ schools (all private at that time) and all extracurricular activities, the traffic was truly horrendous (an hour plus during rush hour to drive those 23 miles), a challenge with combining 4 children (3 boys and 1 girl) in the 2 available kids’ bedrooms…so we converted another living space to a third “kids room” and did the best we could…and one of the biggest reasons I think (with hindsight) is I underestimated what it was to move into “their” house where a maternal figure had already lived.
Steve’s boys were 15 and 11 when we married. My son was 10 and my daughter was just 5. It was a lot to ask of all of them to become step-siblings at all–let alone to ask them to overcome the housing challenges. The tension and understandable “territory” issues as well as the feeling like a “visitor” was making the already difficult blending seem insurmountable. After a short discussion we listed the house for rent (on our own–no real estate professionals involved initially just to see what would happen) and then things really started happening fast. We were SO blessed to be contacted by a couple with no children and no pets (great qualities in a renter) who have now been in the home for near two years. They have been phenomenal renters.
The blessings kept flowing in September 2010 and we found the perfect rental house for our current needs. The neighborhood we are in could not be a better fit for this family! Our office commutes are now 5 miles, the kids’ schools are either by bus or just 3 miles down the road and we have no traffic. The house is 4 bedroom, 3 bath and the positive impact on our household was worth the expense of a move just 10 months after we married! Our rent is $1795 per month and we are in an excellent area. I don’t want to own this house because it is much too big (and has foundation issues) and we envision being in something much smaller (and single story!) but it is perfect for where we are right now.
So, why this long drawn out story? September 1 is the 30-day mark for our tenants to give us any notice of move out…and shortly thereafter is our deadline to give our landlords notice of our intentions…the tenants have expressed an interest in buying the house but we don’t know if they are financially able to right now…and if they can give us what we need to break even on the house and not have to show up with $10,000-$15,000 at closing…if they do want to buy and are able to do so, then we face another tough situation because we will get nailed by federal income tax if we don’t have a mortgage deduction but we don’t want to buy a house to fit our needs at this moment because we still have a houseful of kids…and we aren’t in financial position to buy a house anyway! We can’t even afford to MOVE right now! Whew. Are you as worn out by reading this as I am by thinking about it?! So little of it is within my control and I know that but the end of July last year and now this year is when this voice in my head starts talking about this stuff! I feel better sharing it and will hope and pray for the best. Fretting over it won’t change anything.
Upon reread I am laughing at myself because my writing tonight really does come across as the frantic thoughts in my brain! That’s a scary place for me alone and now I’m dragging all of you with me! Ha! I’m particularly struck by the overuse of (parentheticals) in this post but I am laughing about them….a funny read for me!
Born and raised in Texas. I’ve at least driven through every state in the US courtesy of a roadtrip loving Dad.
I’m single with two children and a good parenting relationship with their father.
I am a “life is just half full of funny” kinda gal. Humor is my saving grace and I am thankful for it every single day. I have a strong Catholic faith and am thankful for that foundation.
I read a lot for a living but still enjoy a good book. I love biographies but in recent years have found the need for fun fictional books–sadly, for a long time I just didn’t enjoy fiction!
I love live theatre of any kind–from local productions to Broadway.
I love to scrapbook and pride myself in my kids’ albums.
I love being a mom but also love my career. I’m blessed to have found a balance allowing me to be at everything my kids need and want me to be at–while also having a career.
Favorite Quotes: Well behaved women rarely make history.
Behold the turtle. He makes progress only when he sticks his neck out. -James Bryant Conant
I think you very wise to start thinking about this now. Why not? It is a situation that is going to happen, lol. At least you know about it up front instead of having a “surprise” happen. I say pray about it and discuss it with your husband. You guys will make the right decision based on your situation. 🙂
It sounds to me like you know exactly what to do. Am I wrong? You can’t afford to buy a house or sell his house, so the answer is… don’t do either, right?
Why don’t you discuss a rent-to-own situation with your current renters?
why are you going to be ‘nailed’ by taxes? You are already paying the taxes, insurance, and interest for this house AND you are claiming rent on the property, If you sell it you will not be paying any of these things so you will be that much better off.
I can certainly see your concern. It’s a lot to think about. Here are some things to think about:
1) Regarding Steve’s house, housing prices aren’t what they were in 2007 and no one can predict when or if they will ever come back. If you get a solid offer, I’d take it, even if it were a loss, since I don’t think the prices will return to those levels for quite some time. Also, factor in a real estate professionals commission fee to sell that house…if you don’t take the current offer, you may be left with a worse scenario, taking a loss AND having to pay a real estate professionals fee which would be MORE than the current anticipated loss.
2) Given the travel from Steve’s old home to the jobs and the fact that it was the house from his previous marriage, I say, that I’d let it go.
3) Next, regarding your current rental home, you can always opt to rent another year instead of forcing yourself into a new mortgage or bad financial decision. Take your time. When I am not sure what to do, I simply defer a decision for 6 months or a year. That takes the pressure off of me and the answer typically comes to me before then and I feel good about it. It doesn’t happen often, but when it does, just knowing that I can defer a decision helps. Deciding to rent another year and defering the buying decision for a year would be helpful. Also, it wouldn’t hurt to meet with a professional inspector regarding your current home. Have a thorough inspection and get the costs to repair the foundation and anything else. It may or may not be something you want to do. If you learn that the foundation issues are fairly reasonable cost wise and there aren’t any other issues with the home, it might be worth considering purchasing this home. If it works this well, it’s worth it to get more information. Once you have the new information on the costs for foundation repairs, then you can either continue renting or talk to them about renting with an option to buy or purchasing the home. Once you know the costs to repair the foundation, then you can make an “appropriate” offer on your current home factoring in the foundation repairs. Chances are the homeowner is well aware of the issues and may be one reason as to why they are renting (in addition to the housing market being down). Perhaps the biggest issue regarding the foundation is of course the safety factor…is it safe to be living there?
4) Regarding taxes, it doesn’t hurt to meet with a tax professional NOW regarding your options. So let’s say you decide to sell and take their offer, then go to a tax professional and talk about your options on what you can do THIS year to lower your taxes. Even without selling my home, I typically would review my taxes two to three times a year to see where I was at (I always liked to break even and not get a big refund since it meant I lent Uncle Sam my money interest free!).
5) Your comment about not wanting to purchase a home since the kids weren’t going to be around forever. Instead, once you are in a better financial position, it may be a good idea to purchase a home that fits your “current” family. You’ll get the tax break, plus interest rates are at an all time low and many home prices have dropped considerably. I think it’s a great time to buy HOWEVER get all of your credit card debt and cars paid off first.
6) The life lesson here and as you go through it is that life is expensive which is why having too much debt is a burden for everyone. When you have too much debt, you have to worry about stuff like this. Having a lot of kids, means that there will always be things (life) coming up along the way and it’s expensive. You are on your way to being debt free and I am sure it’s just one more lesson along the way.
Good luck. Hang in there.
Just a local perspective. Texas is growing and rental vacancies are few. You could rent the old house for some more years until you are out from underwater.
Housing is tricky. I think there’s this inherent desire to own a house. I have it too but the benefit is not as obvious to me. High transaction costs, high holding costs, 2-3% value growth, illiquid (hard to sell). All the traits of a bad investment. Look up James Altucher’s blog on why I will never own a house again.
Anyway, just saying there’s no hurry to buy.
I agree with Dream Mom in having your accountant run a couple of scenarios for you on the pros and cons of selling the house to your current records. This gives you a definitive number to work from.
Talk to Steve on the emotional costs of the house. It is among the leftover baggage of previous marriages. You’re paying off credit card debt which is also baggage. Then consider what happens if your renters life situation were to change and they needed to break the lease and move immediately. There is a lot of risk associated with relying on rental income. We all know that the other shoe tends to drop when we are least prepared for it.
Balance the financial with the emotional and I know you’ll make the best decision possible for your family. (Personally, I’d sell that house like it’s hot.)
With the uncertainty about the tenants and that you could also be given notice soon, I would suggest increasing your emergency fund until you know what will happen. Whenever you’re a renter, you can be told to vacate when your lease is up–it just happened to my 73-year-old aunt, 30 days to find a new place and move.
I know you want to pay off debt as quickly as possible, but if I were you, I’d pad that emergency fund as much as possible until September. You can always send in a huge payment once the housing situation is resolved, but it would be hard to get the cash back if you needed it to be able to move quickly.
I second this idea. I would delay any extra payments to debt at this point and pad that emergency fund until Sept. If you don’t need the money then, go ahead and dump a large amount on your debt.
I say this after our tenants broke their lease 6 months early back in May. Unfortunately, they were horrible tenants and really trashed our property so it took 3 weeks to repair it back to a rentable state. It has been sitting on the rental market ever since with only one viewing. We have no idea when it will rent and are paying 2 mortgages and utilities in the heat of summer on 2 houses.
Thankfully, we are able to afford this and were prepared for a situation like this before we ever bought a new house, but it still sucks.
Be prepared for no tenants!! I know you said they’re great tenants, but they may choose to vacate for whatever reason and you must be prepared for that!!
I wouldn’t sweat the mortage deduction. Unless we’re talking about a very expensive house, the effect on your taxes should be fairly inconsequential, and I would imagine a small price to pay relative to the financial flexibility that you would achieve being rid of it.
This. Most people don’t understand how the interest deduction works and overestimate it. If you’re unconvinced, get a workup done by a tax pro about how taxes will change if sold; should be fairly inexpensive. And forget about your other issues – keep leasing the rental and don’t even think about buying it. That would be way too much going on – how would you even obtain a mortgage if you have no down payment?
Agree..you pay out more money for the deduction than what it saves you..have your taxes done both ways so you can see…and remember you will no be paying ins. Mortgage and insurance. You should be surprised. We are all sold this “you have to have a mortgage for tax purposes” but it really isn’t so. Good luck…I am like you…already budgeting and planning for sept and oct.
I don’t know your exact tax situation, but I would think you could adjust your withholding to avoid getting hit with a big tax bill in April, and you could meet with a CPA to figure out how to avoid that weird underpayment penalty should you sell the home mid-year. (I’ve gotten burned with the weird penalty, and it’s painful!)
While you wouldn’t get the mortgage interest and property tax deductions, you also won’t be paying for maintenance on the old house and the mortgage principal, I’m guessing if you ran the numbers it would be close to a wash.
But, I don’t blame you for thinking about this now. If I were in your situation I’d be thinking about it now, too!
You are not going to get “nailed” with taxes. Tax deductions COST you more than they save you (sort of). Let’s say you get a $10,000 deduction due to mortgage interest. The percentage you “save” on your taxes is your tax rate. So if you’re in the 25% tax bracket, you get back $2500 in tax savings. So you’re paying out $10,000 in interest to “save” $2500. Not having the deduction means not paying a WHOLE LOT MORE money to the bank each month.
I think Claire is speaking more of the tax liability of selling a home at a profit when you don’t live in it, in which case the $500,000 of exclusion for a married couple, $250,000 for a single person doesn’t apply.
It doesn’t sound like it from the post — she specifically mentions that they don’t want to have to bring money to the closing, and the sentence about being nailed by taxes specifically references the deduction…
I thought you couldn’t claim the mortgage interest deduction if you were renting it out?
But yeah, most people far overestimate the benefit of the deduction.