Income Taxes
The most important positive for living in your own apartment building is that there will no longer be taxable rental income on the income tax return of the owner for the unit occupied by the owner. On the owner’s income tax return the taxable rental income would decline which might enable the taxpayer to avoid the alternative minimum tax, to itemize deductions, to have some medical expenses as deductible, and maybe other income tax benefits depending on the particular situation of the taxpayer.
Former Residence
If the owner was formerly a renter themselves, it is even more financially beneficial because the owner does not have to pay taxes on the rental income of the unit now occupied by the owner and then in turn pay their own rent from what is left over after taxation. If the owner was formerly an owner/occupant of a single family residence, apartment living could be less expensive in many ways.
Property Tax
If the owner did not have a homeowner’s property tax exemption before, the owner/occupant would now have the benefit of a $7,000 reduction in the “Net Taxable Value” on the property tax bill for his or her owner occupied property. It is necessary to apply to the County Assessor one time.
Personal Residence Allocation
A ratable portion of the rental property would now become the personal residence of the owner/occupant. Upon sale or even some tax-free exchanges, any capital gain would be reduced by $250,000 for single taxpayers and $500,000 for married taxpayers as opposed to the whole capital gain net profit being taxable even if it is only at 15%. There are many requirements too lengthy to discuss here. The portion of the apartment building that would be the personal residence of the owner/occupant is based on the square footage of the owner occupied apartment as it relates to the square footage of the whole building. This would also apply to allocating expenses and capital improvements on the owner’s income tax return each year. The depreciable portion of the apartment building now that one apartment is a personal residence would go down based on the same square footage computation as the expenses and capital improvements.
Manager
Another obvious large benefit is that there is usually no need for a resident or non-resident property manager which could save thousands of dollars each year, radically improve communication with the tenants, and avoid many management pitfalls between managers, tenants and owners.
Tenant Reactions
There are many personal and psychological implications to living in your own apartment building. There are some tenants that do not like to live in apartment buildings occupied by owners because those particular tenants would feel that the owner’s presence in the building was too invasive, controlling, or inhibiting for their lifestyle. On the other hand there are some tenants who would love to live in an apartment building occupied by the owner because there would be no hassles with an on-site or off-site manager when the tenant could go directly to a more accommodating owner/occupant for immediate answers.
Owner Reactions
As to the owner/occupant, many owners would never live in their own buildings no matter what the financial, tax or other benefits would be. First of all, these owners are usually well off or even wealthy. Secondly, many owners do not want the exposure, closeness, or added responsibility usually called for when an owner occupies an apartment in his or her own building. This type of owner does not want to be exposed to being bothered, confronted, or even approached by tenants, which they consider complainers or worse. These owners want to rely on their property managers, either on-site or off-site. It is my opinion, based on my 70 years of property ownership, that these managers will never do the adequate and caring job that an involved owner/occupant would do.
On the other hand there are owners who are genuinely interested in, supportive of, considerate of, caring for, and wholeheartedly sympathetic to all those tenants worthy of the highest respect. Yes, it may not be the attitude that results in the most profit in the short run, but it is definitely the attitude that results in the most profit in the long run. Some owners actually like helping, communicating, and rewarding their tenants, but everyone says never engage in a close friendship with any of your tenants, which I definitely recommend.
Saving Expenses and Improving Maintenance
If the owner lived in his or her own building, they might be their own gardener, their own maintenance man (within limits), monitor the mailbox, pickup all the debris and weeds, water the lawn, clean the parking area, monitor the trash bin, make inspections, spray for insects, do small repair jobs, clean vacant apartments, clean rain gutters, clean steps and balconies, maintain the alley, etc, etc., etc., and have one clean, well-maintained, and well-managed building, which is rare. It is called “pride of ownership.”
Jerry Feldman is a retired CPA after 50 years of service.