notes on a
condominium purchase
Thomas S.
O'Rorke REALTOR® Orange Beach,
Alabama Office Licensed Broker in
Florida and in Alabama ============== KAISER
REALTY, INC. Gulf Shores,
Alabama Toll Free •
877-854-8843 Cell •
251-942-7089 Fax •
251-981-2025 Email •
Tom@BeachBuys.com Welcome
to beachbuys.com The best
interactive real estate web site on the Alabama gulf coast.
Let me help you find your dream property. BEACH PROPERTY
OWNERSHIP 101 This article is for those of you
who are unfamiliar or inexperienced with resort property
ownership. I hope it will help you in deciding if and
what to buy. The definition of beach property
can be very broad, but for our purposes, it refers to
houses or condominiums located on the beach directly
facing the Gulf of Mexico. One of the biggest advantages
of investing in beach property is that unlike CDs or
mutual funds, you can visit your investment. You clearly
should enjoy coming to the beach. That's what makes
resort property investing fun. You can have your cake and
eat it too. The ideal way to own resort
property is to place it in a good rental program and
treat it as investment property with the IRS. While there
are disadvantages to this, the advantages more than
outweigh them. This method of ownership allows all
expenses associated with your property's operation and
maintenance to be classified as business expenses. The
only portion of your cost not treated as a deductible
expense is the principal portion of the mortgage
payment. Most property is purchased with a
20% down payment and an 80% loan. This mortgage payment
will be the largest of your expenses. Others will
include: utilities (power & telephone), property tax,
rental management fees, and contents insurance. The
association fees often include maintenance of the
building, grounds, pool and elevators, reserve funding,
water, trash pickup, sewer fees, and cable TV. Your gross rental income will not
cover all of your ongoing costs of ownership. Your
property will show a negative cash flow typically ranging
between $5,000 and $20,000 per year or more. The good
news is that you can depreciate your furnishings (double
declining 7-years), appliances (double declining
5-years), heating and cooling system (double declining
5-years), and the building is depreciated on a straight
line basis over 27 and one half years. When the depreciation is added to
the expenses and applied to your tax rate, you want to
find that the actual tax savings will approximate the
actual out-of-pocket expenses (negative cash flow). A few
years ago this would have been the case. Now your rental
income will not carry the property for you but will most
likely show a loss even after taxes. It will however help
considerably and in most all cases the property will
increase in value each year. The downside to this type of
ownership is the usage of the property. Since this is a
business investment, the IRS will not allow you to use it
at will. Your use is limited to 10% of the number of days
the property rents per year, or 14 days, whichever is the
lowest. The 14 days will apply. This restriction creates
a problem but one which can be overcome. As a business investment, you are
allowed to make trips to the property for maintenance and
work on the property. The days spent in this fashion do
not count towards your 14-day use allowance. With
maintenance trips of say, once a quarter, you can add
another 10 or 15 days to your usage. For even more usage
you may rent the property through the property rental
manager. While you are paying full price, all but the
manager's fee will be returned to you. The above described ownership
techniques are a driving force behind many beach property
purchases. These techniques allows you significant use of
your beach property while sill providing you with maximum
tax benefits. If you have questions regarding this type
of ownership please contact me and I will do my best to
answer them. And always remember to consult your C.P.A.
or tax attorney regarding your rental
property. Thomas O'Rorke June 2004 Condos
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