As a new foreign service officer, I wonder if I ought to buy a condominium before going out on my first assignment. I have to weigh the tax shelter aspects against the cost of renting and managing the condominium while I am overseas. Also, I understand that the IRS interpretations of tax laws regarding occupancy may be in flux. If I do not live in the condominium immediately, but rent it out and then live in it (for six months or one year) after I return, can I still claim it as an owner-occupied residence? Other foreign service officers also are unclear about this situation, and your advice would be helpful.
Under the new tax laws, I strongly recommend that you base your decision on economic factors, rather than on tax shelter reasons.
Perhaps the most important questions to be answered are whether you are going to be back in Washington in the years to come, whether this particular condominium will be suitable for your future needs, and whether you expect this property to appreciate in value. While I recognize that one needs a crystal ball to answer these questions, give serious thought to these issues before you buy that condo unit.
The answer to your tax question is relatively easy. There is no definitive law on determining whether your property is your principal residence. If you have been able to re-establish the property as your principal residence, when you sell it there are a number of tax benefits available to you under current law, such as the roll-over and, ultimately, the once-in-a-lifetime $125,000 exemption for "senior citizens."
As I understand the law -- and the way the Internal Revenue Service interprets that law -- a determination on whether a property is a principal residence is based on the facts and on a case-by-case basis. If you have moved back to Washington and have moved into your property, have registered to vote and have paid taxes in the jurisdiction where the property is located, have your drivers' license in that jurisdiction and can demonstrate that your real motive for moving back was to re-establish the property as your principal residence, then it really does not make a difference whether you have lived in the property two or three months or two or three years. A residence is a principal residence based on the facts -- and not on length of time.
You should be careful when purchasing the property, however. Because you do not intend to move into the property immediately, your lender will treat the property as investor-owned, and your interest rate will be higher than for owner-occupied property. On the other hand, if you really intend to move into the property and do not currently have orders overseas, then I suspect that you can honestly treat the property as owner-occupied, thereby obtaining a more favorable interest rate loan. The fact that you are subsequently transferred will not affect your initial status.
Being a landlord is not always easy. There are always rules in the various jurisdictions that affect landlord rights. In the District, for example, the laws are heavily stacked against landlords. If you buy your condominium in the District, make sure that you have complied with all of the landlord-tenant regulations when you rent out your property.
Property management can cost you a percentage of your rent. Generally speaking, property managers will charge between 6 and 10 percent of the monthly rental, and you certainly should negotiate a fee before committing yourself to a particular property manager.
You should also insist that the property manager send you monthly financial reports. There should also be a contract between you and the property manager spelling out your rights as owner and the obligations of the property manager. For example, in the event that the property manager has to spend money to make repairs, there should be some ceiling on the amount the manager can spend without your permission. Even though you might be out of the country, I suspect that you still could be reached at most times. Again, enter into a carefully drafted contract between you and the property manager before you leave.
As I have indicated, tax benefits may be available, but they should not be the major factor in determining whether you should buy. Over the years, if the property has increased in value, that will probably be of greater benefit to you than the tax benefits currently available under the federal tax laws.
Property values have continued to appreciate in the Washington metropolitan area, and I suspect that they will continue to do so for a long time. You should, however, carefully read the condominium document and make a special review of the condominium budget. If the condominium has little or no reserves, then maybe this project is not for you. You do not want to be hit with a large special assessment because the roof needs to be replaced or the boiler repaired.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address