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To sell or not to sell rental house
Old 06-04-2018, 12:17 PM   #1
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To sell or not to sell rental house

In Dec. 2011, I got pretty lucky on timing and bought a rental house for $150k. Today it's worth ~$360k. I've had it rented the whole time, and I don't particularly love being a landlord, but I've liked the consistent income. My theses for holding it are starting to change. My "good tenant" from past three years is moving out. I liked that it was zoned for a good Jr. High School, which could have helped my kids if necessary, but they just got into a charter school I like that runs through Jr. High. And I had a feeling the market was "cheap" when I bought it, but now I don't really believe that. I think my area will see "normal" appreciation going forward, possibly even a real estate price decline. (Our area got hit with a loss of around 60% from peak to trough during the real estate collapse a decade ago.) So I'm considering selling. The challenges with selling would be: a) tax bill of around $50k on the gain and another ~$15k in real estate commissions, b) no great options of where to put the funds. For the real estate investors out there: The current CAP rate would be a measly 4% or so for someone buying a today's prices with today's rents.

So my question is: Should I sell the house, or keep it and try to find a new good tenant?
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Old 06-04-2018, 12:23 PM   #2
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A lot could depend on how quickly you can find the next "good" tenant. Are they knocking on landlords' doors in your area? If so, I would keep renting.

But if there's going to be a lot of vacant time while you search for someone who won't be a PITA or a deadbeat, that can get expensive fast.

Have you set your CG and depreciation recapture against (unallowed) passive loss (if you have any), to see how much the tax bite is likely to be?

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Originally Posted by RenoJay View Post
In Dec. 2011, I got pretty lucky on timing and bought a rental house for $150k. Today it's worth ~$360k. I've had it rented the whole time, and I don't particularly love being a landlord, but I've liked the consistent income. My theses for holding it are starting to change. My "good tenant" from past three years is moving out. I liked that it was zoned for a good Jr. High School, which could have helped my kids if necessary, but they just got into a charter school I like that runs through Jr. High. And I had a feeling the market was "cheap" when I bought it, but now I don't really believe that. I think my area will see "normal" appreciation going forward, possibly even a real estate price decline. (Our area got hit with a loss of around 60% from peak to trough during the real estate collapse a decade ago.) So I'm considering selling. The challenges with selling would be: a) tax bill of around $50k on the gain and another ~$15k in real estate commissions, b) no great options of where to put the funds. For the real estate investors out there: The current CAP rate would be a measly 4% or so for someone buying a today's prices with today's rents.

So my question is: Should I sell the house, or keep it and try to find a new good tenant?
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Old 06-04-2018, 12:41 PM   #3
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Sell.
Perhaps you can offset the capital gain with stock losses ?

Suppose you wait 10 more years, the tax bill will be higher, so the fear of taxes should not matter.
Can you avoid other income to keep the tax rate low ?

Are you so sure about the taxes ( 360 - 15 = 345 , 345 - 150 = 195K , 195K * 15% = $29,250 in taxes.) Plus the recapture of depreciation
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Old 06-04-2018, 12:41 PM   #4
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I'm going thru the same process right now. Wwe have 24 units and i'm thinking of selling a 4-plex. We live in the Seattle area and have experienced incredible growth in our RE portfolio since we first started investing in 2002 (with this 4-plex, incidentally). If I sell, i will not replace it so will pay tax on the gains and depreciation recapture. The property throws off about $1800/month and we would net about $500k after all selling costs and taxes. I'm only thinking of selling this property so won't sell anything else until we are "done". The main reason for selling, at least for me, is to take some of the money off the table as I think we are very near the top of the market, if not already there.

Good luck with your decision!
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To sell or not to sell rental house
Old 06-04-2018, 12:52 PM   #5
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To sell or not to sell rental house

We want to get out of the landlord business too. We have two rentals, one townhouse occupied by an eighty something sweet lady who wants to live there with two of her grown kids until she dies. The other is a weekly beach rental that we won’t sell, and just keep for ourselves. We compromised and hired a property manager to care for the property while she remains there. When she’s gone, we’ll sell the townhouse and pay the taxes. The beach house will pass to our heirs.
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Old 06-04-2018, 12:57 PM   #6
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After taxes, a sale would net you a 100% profit on a 7 year investment. I would sell. Like many areas that have seen a great increase during that timeframe, most of it was reversal of the housing crash, and the best is probably behind you.

You could then invest the net +$300k in somewhat conservative investments and replace some of that nice income.
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Old 06-04-2018, 02:29 PM   #7
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Sell. Pay the tax.

You will have to explain "No great options where to put the funds....".

Invest early. Invest often. Invest fully at your appropriate mix of stocks/bonds/cash.
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Old 06-04-2018, 02:54 PM   #8
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Take the money and run. Pigs get slaughtered. There is no gain unless you realize it.
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Old 06-04-2018, 05:49 PM   #9
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1. Look into a 1031 (tax deferred) exchange. Google it. Quite simple, just some paperwork and having to buy a new place when the current one sells.
2. You aren't restricted to residential rentals: farm land, commercial buildings, condos, etc., all qualify.
3. Consider buying something you might want to live in down the road (vacation home?? Downsized retirement home??). Rent it out for a few years, then move into it. No sale, so no taxes. Then die and leave it to your heirs....
Obviously, you want your CPA to look into any of these ideas....
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Old 06-04-2018, 05:58 PM   #10
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I am facing a similar situation. My first tenant was great, but I am not sure that will be replicated.

Have you considered invoking a professional property management firm? That could be a third option.

If, on the other hand, your concern is capital appreciation and not recurring income, then a sale may be appropriate.

In my case, I have about 25x expenses in liquid investments, so having the rental income is a nice diversification even if the capital appreciation is modest.

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Old 06-04-2018, 06:11 PM   #11
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If it's in a secondary market like Reno, I would sell. Those markets are the last to go up and the first to come down. And good luck finding a decent tenant when employment slips.
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Old 06-04-2018, 06:19 PM   #12
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We sold our last rental in January. As you indicated, due to price appreciation, your current cap rate is low. I see three options.

1) Sell and reinvest the money elsewhere. (pay the taxes)
2) Sell and use a 1031 exchange to purchase properties with better cap rates. (delays the taxes but you are still in the rental business)
3) Sell and owner finance if possible. Provides decent monthly income and spreads the tax bill over a number of years.

We hold the mortgage on a commercial building we sold. It has worked well for the last 6 years and the note pays about 5.75%. We realize only a small portion of the capital gains each year.
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Old 06-04-2018, 06:21 PM   #13
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You could 1031 your money to a place like Memphis, Indy, KC, etc... and buy 3 houses for $110k each and each would rent for about $1,200 gross per month. Even after 10% for a property manager you'd be doing a heckuv a lot better than 4%.
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Old 06-04-2018, 07:08 PM   #14
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Keep renting it out locally, Reno is on the move, I see lots of growth in this area, long distance landlording is a real crap shoot. You have to ask yourself where you’ll put the proceeds, the stock market is just as toppy as housing
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Old 06-04-2018, 07:57 PM   #15
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)

3) Sell and owner finance if possible. Provides decent monthly income and spreads the tax bill over a number of years.



We hold the mortgage on a commercial building we sold. It has worked well for the last 6 years and the note pays about 5.75%. We realize only a small portion of the capital gains each year.

I like this idea and had been thinking about it. And I hold a number of notes on properties and am comfortable with that concept. But how do I specifically find someone who wants to purchase this specific house AND have me hold the note? (I wouldn’t go below 6% and would require at least 20% cash down payment.)

Another thought I had was to make this place my primary residence for two years in which case the tax pretty much evaporates.
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Old 06-04-2018, 08:08 PM   #16
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Another thought I had was to make this place my primary residence for two years in which case the tax pretty much evaporates.

I’m pretty sure the recapture tax stays with you until you sell or die. The capital gains can be avoided by living in the property as a primary residence for two of the five years before you sell.
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Old 06-04-2018, 08:37 PM   #17
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Keep renting it out locally, Reno is on the move, I see lots of growth in this area, long distance landlording is a real crap shoot. You have to ask yourself where you’ll put the proceeds, the stock market is just as toppy as housing
I have to agree, there is demand in Reno. Lots of boomers with super expensive homes in California moving to Nevada where proces are no where near that level. IMHO
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Old 06-04-2018, 11:35 PM   #18
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I have to agree, there is demand in Reno. Lots of boomers with super expensive homes in California moving to Nevada where proces are no where near that level. IMHO
I just got off the phone with my folks in the SF Bay Area. They said they recently read an article that 50% of bay area people plan to move in next few years. If that's anywhere in the vicinity of the ballpark of accurate, it should definitely benefit Nevada as well as neighboring states. Generally I'm very decisive with financial decisions, but this one with the rental house is a tough one for sure.
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Old 06-05-2018, 06:11 AM   #19
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I’m pretty sure the recapture tax stays with you until you sell or die. The capital gains can be avoided by living in the property as a primary residence for two of the five years before you sell.
My understanding is that yes, the recapture stays with you, but the capital gains are pro-rated between the time it appreciated as a rental and appreciation during your living in it. IRS plugged that loophole about a dozen years ago.

But, again, bring in the CPA's.....
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Old 06-05-2018, 07:04 AM   #20
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Take the money and run. Pigs get slaughtered. There is no gain unless you realize it.
I believe the expression is..."pigs get fat...hogs get slaughtered."
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