Renting or selling the rental property

[tryan]

I'ld say there's no better time to unload this one ... prices are at an all time high and TAXES are at an all time low. Wait until the Dems have the Whitehouse (and house n'senate too) and taxes will only get worse. AMT will be an issue but holding out for a "fix" is futile.

The only thing that trumps the $$ is having a place for your daughter. Young adults will have a heck of a time buying in HI going forward. Only you can answer that one.

[Nords]

Well that was painful but I think I've addressed all the questions. Here's what I've learned.

Sales are running hot in our neighborhood, so a 29-year-old 4BR 2BA 1800 sq ft home on a 5400 sq ft lot would sell for about $650K. (The county even repaved the street last month.) With nothing to lose and no rush to close we'd FSBO next April-- just as the season heats up.

This is a long-term rental property and our other income puts us at the top of the 15% tax bracket so federal long-term cap gains would also be taxed at 15%.

Depreciation recapture is taxed at 25%. Total depreciation through the end of 2007 will be ~$57K.

I can't find any evidence that Hawaii taxes depreciation but I'd appreciate it if any of you Hawaii veterans can point me to a reference.

Hawaii long-term cap gains tax is 7.25%.

Federal AMT is triggered. I have no freakin' idea how it's determined but the TurboTax website estimator puts it around $7500.

We sold a CA condo in 1989 and deferred taxes on the cap gains by applying them to the purchase of the Hawaii home (which is now a rental). This old tax rule went away in 1997 but it still applies to the sale of the Hawaii home. We're required to reduce the basis of the Hawaii home by the amount of the cap gains deferral. Our 1989 IRS Form 2119 (Sale of Home) lists that amount as ~$28K.

Tweaking our basis numbers (and subtracting the CA condo cap gains from the basis) gives us a sale basis of ~$330K.

Assuming a $650K sale and subtracting the $2000 in FSBO closing costs, the $330K basis, and the $57K depreciation leaves cap gains of $261K.

Taxes are roughly $39K federal cap gains, $19K Hawaii cap gains, and $14K depreciation recapture. Adding in the AMT gives a total tax of ~$80K.

This calculation is also complicated by the AGI's phase-out of deductions & exemptions but AMT will probably stay below $10K unless the sale price really zooms up. We can reduce a bit of the taxes by skipping a Roth IRA conversion and not making any charitable donations that year, so let's leave the house sale's total tax impact at a conservative $80K. I doubt it'd be higher.

So after running a $650K buyer's check through the title company's escrow, the mortgage company, and our tax returns, we'd bank $650K - $2K - $135K - $80K = $433K. $66K is the price we'd pay by not moving into the rental property for two years in order to avoid cap gains taxes. (I doubt we'd escape depreciation recapture!) The moving expenses (and the colossal hassle factor) make this a non-starter; I can nurse a lot of tax pain while I'm looking at that deposit slip. And oh yeah, a 5% CD would cough up $1800/month.

The tenants asked us this week if they could start a childcare business out of the home. ("Uhm, NO!! thanks for asking, let me check the homeowner's association rules and I'll get back to you.") With my pension, this unexpected windfall, and their requests I've lost all of my landlording ambition. Now we'll go over the spreadsheet with my spouse and see how she feels about those phone calls...

Did I miss anything?