Selling real estate

[Purron]

DH and I have two homes in the DC area. Our plan was to move into our rental for two years to avoid capital gains taxes then sell both our properties and find a retirement home. Well, like most areas, the real estate market is awful around here. Therefore, we have decided to stay put for a while. We are fortunate to have great renters and positive cash flow in our 2nd home.

I'm wondering if others have decided to put off the sale of real estate, and if so, when you think the real estate market might improve. I know this varies a lot depending on the area of the country you live in, but am just curious on when folks think real estate sales will improve in general.

I would also be interested in opinions on if this overall strategy is sound. Our rental property is unusual for this area in that it sits on two acres of land and is only about 25 miles from DC. Even with the big lot, it's a very modest home and would be attractive to first time home buyers, particulary those who want enough land for horses or dogs. I wonder if it would be a good idea to put it on the market, take the capital gains hit if it sells, invest the proceeds, and sell our current home when the market improves. Our current home is far from being a McMansion type of place, but is worth quite a bit more than our rental.

We look at our rental as an investment and just wonder if it's the best place for our funds now. On the one hand, selling in a down real estate market would be like selling stock when the stock market is low. On the other hand, I wonder if it would be smart to cut our losses now and move on.

[tryan]

If history repeats (1990's ... SL "crisis") it'll a decade or more before you see the last highs hit again. Of course, with a positive cash flow (GREAT JOB!!) ... who cares?

As far as the strategy, a new administration can undo the Clinton 2 year rule. Unlikely ... but possible.

[Westernskies]

If you don't need the cash right away, I would consider selling the rental with owner financing. Credit is going to tighten up (read: higher interest rates) and I would feel better sitting on a RE contract with a nominal DP and a fixed interest rate than a Wall Street portfolio right now. Find the right buyers (current tenants?) and you will probably come out ahead, IMO.

[unclemick]

Quote:

Originally Posted by Westernskies If you don't need the cash right away, I would consider selling the rental with owner financing. Credit is going to tighten up (read: higher interest rates) and I would feel better sitting on a RE contract with a nominal DP and a fixed interest rate than a Wall Street portfolio right now. Find the right buyers (current tenants?) and you will probably come out ahead, IMO.

The husband had a love affair with his female shrink and in the subsequent divorce the duplex was sold(I had depreciated to zero over the years before selling to the tenants).

I made the IRS real happy as the for sale by owner was paid off.

heh heh heh - early 90's - starting our ER. .

[lazygood4nothinbum]

i'm certainly never expecting to hit again the last high reached in the most unprecedented asset bubble which brought the world to its knees. i would hope regulations are placed to prevent that from ever occurring again.

i would be happy if prices would just come back up to what i suppose are fundamentals, you know, to where prices would have risen had the bubble never occurred. because we are below that here in south florida.

i have no idea when that might happen. i am wavering between holding out and selling short. if i find a fun job, maybe i'll hold on. if not maybe i'll sell even before sanity returns, put five years worth of overseas living away and invest the rest to hopefully let the market ride it up.

so when you find out when real estate is going to improve, perhaps you could also let me know when i should reinvest those proceeds into the market. thanx.

[FIRE'd@51]

From a strictly financial point of view, it depends upon what you plan to purchase with the after-tax money from the rental. If that asset (e.g., the stock market?) has decreased in value by more than your rental, it could make financial sense to do the swap now, especially if the dividend income matches or exceeds the net income from your rental.

The bigger question is probably what to do with your main home. If you are planning to trade down to a less expensive home as most retirees do, you probably will be "hurt" financially in the sense that you will have less money after swapping the homes, given that your more expensive home has likely fallen by more dollars than the one you will buy. On the other hand, there is the not unimportant issue of "getting on with your life", and no one knows when or to what extent the housing market will recover.

[Purron]

Thanks for all the great replies folks. You have hit on many of the issues DH and I are concerned about.

tryan - please elaborate on your point about the 2 year rule. This is a key issue and would be very interested in what you think may happen.

Westernskies - we have thought about owner financing, but frankly would prefer not to have all the hassles that may come with this strategy. Our current renters are a super nice young couple, but I don't think they are that sound financially even though they always pay the rent on time. Basically the kind of folks Suze Ormand directs her advice to.

Unclemick - we might end up making the IRS real happy too. Guess we could take some solice in doing our part for the federal budget.

Lazy - sounds like we are in the same kinda jam - when to sell. If my crystal ball reveals when the real estate market will improve, I'll let ya know.

Fired@51 - not sure about what kinda of retirement home we will buy, but chances are it will be comparable in price to our current home. We would like this to be a place we will be happy in for years, and while we plan on moving farther away from the city, we want a nice place.

[honobob]

Quote:

Originally Posted by Purron I wonder if it would be smart to cut our losses now and move on.

I don't understand what your losses are.

I would not sell in a down market unless I had somewhere better to put the money. D.C. as a whole has appreciated on average 10.05% for each of the last 18 years. If you were in the Capitol View area that figure changes to 27.05% average annual appreciation! Can you beat that somewhere else?

I would suggest that maybe your "starter" home on two acres within 25 miles of D.C. might be under improved. Anything that close to SF or Honolulu would be a tear down for a McM or multiple unit housing or subdivided.

I don't see the housing crisis but a financing crisis. Once this financing mess is cleared up I see housing coming back strong in metropolitan areas very quickly. I used my existing house to purchase my retirement home two months ago. Got a good deal on the purchase and a good deal on the financing. When things heat up again in a few years I will look at selling the Ca property but not until then.

[Purron]

Quote:

Originally Posted by honobob I would suggest that maybe your "starter" home on two acres within 25 miles of D.C. might be under improved. Anything that close to SF or Honolulu would be a tear down for a McM or multiple unit housing or subdivided.

Subdividing is not an option as the property is in an area with zoning restrictions. Fairfax County downzoned a large part of the county in 1982 to protect the water supply and this is not likley to change in the forseeable future.

[clifp]

Quote:

Originally Posted by Purron DH and I have two homes in the DC area. Our plan was to move into our rental for two years to avoid capital gains taxes then sell both our properties and find a retirement home. Well, like most areas, the real estate market is awful around here. Therefore, we have decided to stay put for a while. We are fortunate to have great renters and positive cash flow in our 2nd home.

No advice on Real Estate (I use to think I was competent on stock advice LOL).

However, I have read reports that congress is considering tightening up on the rules that let people switch between their primary and rental properties and avoid Capital gains on both. Nothing concrete has passed yet, but probably would be worth keeping a watch on the tax front.,

[crazy connie]

Not to be a smarty pants but I do not comprehend the selling the home (not particular to 2 home issue here per se) dilemma. So what if real estate has taken a big tumble? What most of us would want to move to for a retirement is usually a smaller property. Those also have declined in value. Slow market here and I get x % less than a year or two ago and where I want to buy is usually close to that same % less as well. Am I over simplifying this? Yes, I know 20% of 500K is a lot more than 20% of 300K but that is just not enough to keep me where I prefer not to be in walking my lifes path.

[calmloki]

The 1031/121 exchange rule has changed already - and not for the better. From IPX1031.com:
UPDATED: Amendment to §121 may affect §1031 Exchange Planning
"The Housing Assistance Tax Act of 2008, signed by President Bush on July 30, 2008, includes a modification to the Section121 exclusion of gain on the sale of a primary residence. This modification may affect taxpayers who exchange into a residential property, and then later convert the property to a personal residence, as explained below.
Under Code Section 121, a taxpayer can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain realized on the sale of a principal (primary) residence if they have owned and occupied the residence for two years during the five year period preceding the date of sale. Gain related to depreciation deductions taken on the property since May 6, 1997 is not eligible for exclusion.
Effective January 1, 2009, the exclusion will not apply to gain from the sale of the residence that is allocable to periods of “nonqualified use.” Nonqualified use refers to periods that the property is not used as the taxpayer’s principal residence. This change applies to use as a second home as well as a rental.
How does this affect 1031 planning? Suppose the taxpayer exchanged into the residence and rented it for four years, and then moved into it and lived in it for two years. The taxpayer then sold the residence and realized $300,000 of gain. Under prior law, the taxpayer would be eligible for the full $250,000 exclusion and would pay tax on $50,000. Under the new law, the exclusion would have to be prorated as follows (the example does not take into account deprecation taken after May, 1997, which is taxable anyway).
• Four-sixths (4 out of 6 years) of the gain, or $200,000, would be ineligible for the $250,000 exclusion.

• Two-sixths (2 out of 6 years) of the gain, or $100,000, would be eligible for the exclusion.
Importantly, nonqualified use prior to January 1, 2009 is not taken into account in the allocation for the nonqualified use period (but is taken account for the ownership period). Thus, suppose the taxpayer had exchanged into the property in 2007, and rented for 3 years till 2010 prior to the conversion to a primary residence. If the taxpayer sold the residence in 2013 after three years of primary residential use, only the 2009 rental period would be considered in the allocation for the nonqualified use. Thus, only one-sixth (1 out of 6 years) of the gain would be ineligible for the exclusion.
In general, the allocation rules only apply to time periods prior to the conversion into a principal residence and not to time periods after the conversion out of personal residence use. Thus, if a taxpayer converts a primary residence to a rental and never moves back in, and otherwise meets the two out of five year test under Section 121, the taxpayer is eligible for the full $250,000 exclusion when the rental is sold. This rule only applies to non qualified use periods within the 5 year look back period of Section 121(a) after the last date the property is used as a principal residence. Therefore, if the taxpayer used the property as a principal residence in year one and year two, then rented the property for years three and four, and then used it as a principal residence in year five, the allocation rules would apply and only three-fifths (3 out of 5 years) of the gain would be eligible for the exclusion"

I am sure that property prices will be back to their highs - and before a decade goes by. That said, I expect ALL prices to go up fairly dramatically as the value of the dollar gets watered down. So will a $200k house in 2008 be worth as much as a $200k house in 2018? We listed our poorest performing multi at a modest price with a listing that ends on 12/31/2008 and are considering listing a little house that a great tenant is moving out of at month end. First time we will have used a listing agent since the first property i sold. It's a tough market, else Mr. Cheapy would be trying to sell them himself. Great time to be buying, crummy time to be selling, but i want to transition out of the rentals - and figure cash now is something i can work with.

[Purron]

Calmloki - I really appreciate the info. Some time ago, I saw your post on another tread about this topic and have looked into it. The way I see it, this is another incentive to go ahead and sell and take the capital gains hit. The expense and hassle of moving will not result in as much of a benefit under the new rules. And, as you said, there is something to be said for having cash now. I'm thinking we should spruce the place up and look at placing it on the market in the spring. Hopefully, the market will be a bit better then. Geez, no easy answers these days. I only wish we had sold the place 5 years ago but, what the hey, we never imagined the market would go into a death spiral.

[Nords]

Quote:

Originally Posted by Purron I'm thinking we should spruce the place up and look at placing it on the market in the spring. Hopefully, the market will be a bit better then. Geez, no easy answers these days. I only wish we had sold the place 5 years ago but, what the hey, we never imagined the market would go into a death spiral.

You'll want to have an asset-allocation plan for where you're going to put the sales proceeds... after paying those righteous taxes, of course.

IIRC the sale of a home after you've lived in it for two years will not relieve you of the burden of paying depreciation recapture for the rental years. And even if you haven't been writing off the depreciation, the IRS assumes that you have and will expect the 25% payment anyway. And then there's AMT.

When we did the math on the cost of moving into a house for two years (including packing, unpacking, and packing/unpacking again) the money wasn't worth it. But I may be a bit jaundiced about moving after a military career full of it.

After 19 years of ownership, only eight of it in residence, we've spent the last 18 months sprucing our rental home up for sale. The plan is to sell it whenever the tenants leave, although we're still waiting for them to make an offer. But the prices around here, and especially in that neighborhood, have held up pretty well.

[Purron]

Quote:

Originally Posted by Nords You'll want to have an asset-allocation plan for where you're going to put the sales proceeds... after paying those righteous taxes, of course. IIRC the sale of a home after you've lived in it for two years will not relieve you of the burden of paying depreciation recapture for the rental years. And even if you haven't been writing off the depreciation, the IRS assumes that you have and will expect the 25% payment anyway. And then there's AMT. When we did the math on the cost of moving into a house for two years (including packing, unpacking, and packing/unpacking again) the money wasn't worth it. But I may be a bit jaundiced about moving after a military career full of it. After 19 years of ownership, only eight of it in residence, we've spent the last 18 months sprucing our rental home up for sale. The plan is to sell it whenever the tenants leave, although we're still waiting for them to make an offer. But the prices around here, and especially in that neighborhood, have held up pretty well.

Thanks for the info Nords. I knew about depreciation recapture but hadn't thought about AMT. I'll definitely check that out. I agree with the cost of moving and just need to convince DH. He hates the thought of paying the capital gains tax.

I wish prices had held up as good around here. Even so, I am optimistic about selling it because the place is a modest "starter home" located within a reasonable commute of the major employment centers. One good thing about the DC area is the job market remains strong. Plus we've noticed more expensive homes, particularly in the outer suburbs, have been slammed the worst. I suspect people are still buying first homes, but not many are inclined to sell their existing homes to move up to a bigger place. Clearly, more people look at a home as a place to live instead of an investment these days.

[2B]

DW and I are interviewing real estate agents beginning today. I've convinced her it's time to downsize. The basic goal is to increase retirement flexibility. We know we'll leave Houston in a few years (FIL is 87 with Alzheimer's -- how much longer can he live?). The second goal is to get rid of the hassle of the "big place." The onlly thing we do with half of our space is store junk, clean, heat/cool, and maintain.

I expect a positive burst in real estate when the credit crunch breaks free during the next month. All the liquidity pumped into the economy will be a mini-repeat of 2003-5. I expect it to go on for 6 months to a year before inflation becomes our new demon. This will also be helped by the almost certain election of "the annointed one." The media will immediately flip every economic news item to a positive. They might not even wait for him taking office.

[lazygood4nothinbum]

Quote:

Originally Posted by 2B I expect a positive burst in real estate when the credit crunch breaks free during the next month. All the liquidity pumped into the economy will be a mini-repeat of 2003-5

boy would that be a godsend. any projections as to % increases or does that just mean stuff might finally move at all?

(oh, & for your morbid reference... Predicting Time to Nursing Home Care and Death in Individuals with Alzheimer Disease )

hey purron, i found some current forecasts by a florida consultant. maybe you can find similar for your area. this guy predicts recession through late 2009 with "pent up" real estate demand unfolding 2010-2011.

Fishkind & Associates - PowerPoint Presentations - Economic Forecast

[2B]

Quote:

Originally Posted by lazygood4nothinbum (oh, & for your morbid reference... Predicting Time to Nursing Home Care and Death in Individuals with Alzheimer Disease )

Based on this calculator, He'll live longer than I will. I'll have to kill him myself. Just joking.

[calmloki]

Bad news! The property tax statements came in today! Tax man claims that the true cash value of our property has, for the second year, increased by an amount greater than the gross rents received in either year.
Good News! Oregon has a property tax limitation rule, so our taxes didn't go up much at all.

Bad news! We can't spend the true cash value increase. The folks used to talk about being land poor when referring to some old farmer living in a ramshackle dump of a house and working long hours keeping his many acres of farmland in good order. Good news! Our house is warm and comfortable and i'm too lazy to work like a farmer.

Good news! We don't have diddly in the market!
Bad news! Well, maybe it's 35% less than diddly now - and come the market surge 2(diddly * 65%)= squat.

[2B]

The palatial estate of Mr & Mrs 2B are now on MLS. The list price is about 5% below what I would has suspected it would have listed for last summer so that's not so bad. At the expected sales price, we would have a 10% profit after 3 years.

The goals of selling is to get rid of a liability in case the Houston engineering market falls apart and to downsize a bit in anticipation of retirement when it does. After a tense week, things seem to be stable on the j*b front but you never know. My FIL is still dazed and confused but, otherwise, he is in good health so I'm not expecting him to trigger my retirement anytime soon.

I hope to be homeless soon.