Selling Residential Rentals, Going Liquid

[dougdo]

We own three rentals, two in Phoenix (huge appreciation in the last 18 months), and one in Portland, OR (healthy appreciation).

Reading the Shiller thread, and considering the natural, normal illiquidity of real estate, we're considering sale of all parcels.  Doing so would end our nice monthly net rental income of $1,900, and incur cap gains taxes of roughly $110K.  Would leave us with $900K in liquid assets, plus a paid off home (fmv $320K).

Torn.  The real estate appreciation has been great, they're paid off, so little downside in terms of cash flow, though having the personal home paid off and nearly $1M in the "bank" would be attractive.  And, rentals can throw a few curves at you.  Your views would be helpful.  Thanks.

I vote for sell. It reminds me of the tech stock bubble. I was enjoying the ride up, up and up so overlooked one important factor: I had enough to ER comfortably at 33. Whether it was the top or not needn't have mattered. Instead I waited another 4 years and ER'd with far less in savings. (But was still able to do it by 37 due to the healthy real estate market ironically). If you can meet your lifestyle goals with a million bucks in the bank and a paid off primary residence, then do it.

 

[LEX]

So far, the media has only examined the rising prices in certain sectors and the amount of speculation underway in housing. I believe the ARM rate increase and default trigger is next year's front page. The credit quality for first time and many newer mortgage slaves has rapidly declined.  I predict that REO inventories will swell in the current "hot spots" such as "SanAngeles" and the New York - Boston corridor over the next 36 months.  No one believed the tech bubble would blow.  Try being a real estate nay sayer and you will be treated as if you have declared Santa dead to a bunch of four year olds in early December....sure sign of emotions trumping common sense....Sell while the gettings good.

 

[Mr._johngalt]

So far, the media has only examined the rising prices in certain sectors and the amount of speculation underway in housing. I believe the ARM rate increase and default trigger is next year's front page. The credit quality for first time and many newer mortgage slaves has rapidly declined.  I predict that REO inventories will swell in the current "hot spots" such as "SanAngeles" and the New York - Boston corridor over the next 36 months.  No one believed the tech bubble would blow.  Try being a real estate nay sayer and you will be treated as if you have declared Santa dead to a bunch of four year olds in early December....sure sign of emotions trumping common sense....Sell while the gettings good.

I kind of agree, but in my case, I never owned RE in the "hot spots", or either
coast, not even an REIT. As I've said before, I've never lost a dime on RE
in my life (net, net, net) and have owned just about every kind you can name.
That said, I fully expect what we have now (not much) to appreciate
steadily and indefinitely. Great locations and bought right. Getaway-
vacation destinations for Chicago and Dallas (and about the same distance
now that I think about it). Double digit jumps in value are still possible
for us.

JG

 

[BUM]

Charles,

When in doubt sell half. Take some money off the table. Wait a while and see how you feel then.



BUM

 

[bhowell]

JG,

I don't know how much of your net worth is tied up in real estate, but based upon your initial post, it sounds as if most of it is.  If most of your investment portfolio is tied up in the residential real estate, I would definitely recommend you diversify your portfolio.  However, I also agree with some of the other posts that selling your properties over several years would probably be the best route.

After using the proceeds of selling the first house or two to diversify into other income oriented investments and equities, you can also use any future sales proceeds to stay invested in real estate.  For the passive investor, mutual funds specializing in REIT's are excellent ways to participate in the real estate market.  A caveat about current REIT valuations: if investing new funds now, I would suggest dollar cost averaging into them over the next 12 to 24 months.  REIT valuations have gone up significantly over the past 36 months and they might cool off.

Even better: invest in REIT mutual funds inside an IRA or Roth.  Dividends tend to be about 50% of the long term return for REIT's.  Putting the REIT's inside a Roth or IRA eliminates current taxation of the dividends.

Just some thoughts.

bhowell

 

[Mr._johngalt]

JG,

I don't know how much of your net worth is tied up in real estate, but based upon your initial post, it sounds as if most of it is.  If most of your investment portfolio is tied up in the residential real estate, I would definitely recommend you diversify your portfolio.  However, I also agree with some of the other posts that selling your properties over several years would probably be the best route.

After using the proceeds of selling the first house or two to diversify into other income oriented investments and equities, you can also use any future sales proceeds to stay invested in real estate.  For the passive investor, mutual funds specializing in REIT's are excellent ways to participate in the real estate market.  A caveat about current REIT valuations: if investing new funds now, I would suggest dollar cost averaging into them over the next 12 to 24 months.  REIT valuations have gone up significantly over the past 36 months and they might cool off.

Even better: invest in REIT mutual funds inside an IRA or Roth.  Dividends tend to be about 50% of the long term return for REIT's.  Putting the REIT's inside a Roth or IRA eliminates current taxation of the dividends.

Just some thoughts.

bhowell

Thank you. 50% is real estate, but still not all that much money. I suspect if I had a lot
more money it would still be 50%. IT's my investment of choice.
Always has been.

JG

 

[Danny]

Getting ready to unload a rental home in California...
What is the capital gain tax rate there right now?
Regards

 

[MasterBlaster]

California doesn't distinguish between capital gains and income tax rates.

I suspect that (for California) any gains will be taxed at the 9.3 Percent rate. (This is the bracket for singles with ~$39k of income and marrieds with ~$78k of income

If your maximum Federal and state brackets are 25 and 9.3 % respectively. And since state taxes are deductable on your federal income,

Then you'll pay 21.975 % total taxes on any gains ==>15% [federal] + (100-25)(9.3%) [state]= 21.975 % total

If your bracket numbers are different then just plug in the correct ones into the formula above.

 

[Danny]

California doesn't distinguish between capital gains and income tax rates.

I suspect that (for California) any gains will be taxed at the 9.3 Percent rate. (This is the bracket for singles with ~$39k of income and marrieds with ~$78k of income

If your maximum Federal and state brackets are 25 and 9.3 % respectively. And since state taxes are deductable on your federal income,

Then you'll pay 21.975 % total taxes on any gains ==>15% [federal] + (100-25)(9.3%) [state]= 21.975 % total

If your bracket numbers are different then just plug in the correct ones into the formula above.

Masterblaster - I was afraid that they wouldn't distinguish...
Thank you for doing the formula... that deduction does help don't it...

 

[tryan]

15% [federal] + (100-25)(9.3%) [state]= 21.975 %

Add a 5% realtors commision and 1-2% tax stamps and it's easy to see why many just keep them for the rents.

Also it you get caught in the federal ALT MIN tax, 15% can shoot up. I paid closer to 18% the year I got hit.

 

[Martha]

We have had the same problem with AMT when selling rental properties.

Also, don't forget the 25% federal tax on the amount you previously depreciated.

 

[Danny]

Add a 5% realtors commision and 1-2% tax stamps and it's easy to see why many just keep them for the rents.

Also it you get caught in the federal ALT MIN tax, 15% can shoot up. I paid closer to 18% the year I got hit.

tryan - told it will be about 6% selling expense (5% commis)...it is easier to just let it ride, but we had a very hard time getting insurance this last renewal, plus I admit I think an earthquake disaster is inevitable-will deflate the market values-and want to get some of the assets there liquid while the market is high...forgot about that AMT... haven't had it yet..this year's income is similar to last year..will this push me into AMT

We have had the same problem with AMT when selling rental properties.

Also, don't forget the 25% federal tax on the amount you previously depreciated.

...and the depreciation...and the extra time on the CPA's bill....ahhh!
...still I have nothing to complain about...I have little problems compared to the people down on the gulf and unclemick..

Thanks tryan and Martha

 

[Danny]

From some quick calculations I believe AMT will hit me big time...

I had heard the feds were going to try to make changes to it this year?

 

[tryan]

I had heard the feds were going to try to make changes to it this year?

The problem - as I understand it - is that the law does not adjust the trigger for inflation.  Soooo the tax law is fullfilling its need ... many, many more tax payers find themselves being called "wealthy" by uncle; and, therefore, paying more taxes by triggering ALT MIN.

Was not aware of any move to correct this.

DISCLAIMER - I am not a CPA; but I talk with one once/twice a year.

 

[73ss454]

Why would they adjust it?

It's a way for the government to legally rip us off.

This cap was set in 1969 when a big salary was 15K.
They tell us that their lowering our taxes and then everyone falls into the AMT and we get hammered again.

It's all political bullcrap!