Selling a Rental Property

[PandaBear]

Hi, I am not real estate savvy, but my dh and I are thinking of selling our rental property. It's in the CA Central Valley. It was mine before I married.

I would like people to share things we should consider before we decide to do or not do it.

A little background.....
Condo is worth about 180-200K, per Zillow and Realtor.com. No idea how accurate this is. HOA is $300, management fee is $65 and property tax about $100 (all per month). Currently renting for almost $1200 per month. It's been paid off quite a while and while I'm not sure of the exact terminology, it has been depreciated to $0 over the years. I paid just under 50K for it. We recently (2-3 years ago, before current renter) updated the unit, as it was needed and previous renters absolutely trashed the place.

Rents may be slightly higher, but philosophically, we don't like to raise the rent on current tenants. For one thing, on such a low rent, it takes quite a while to recoup costs if someone moved. I also like to think we are helping someone out by not raising the rent.

I'm a little confused about what the tax rate would be. When I read articles, I feel like they can be confusing. I'm anticipating our AGI will be about 180K, but not 100% sure, because this year is a funny one, income wise.

I know selling it will impact my dh's medicare costs. (he turns 65 in October 2023).

I have thought about selling it and rolling it over into a new property and rent it to our son, basically with the idea that he would rent to own. I am saying this because we have offered to help each of our kids with a down payment and this could potentially serve as the down payment. But I also have no idea how we could go about doing this.

What else should I think about?

Thank you.

 

[luckydude]

I have thought about selling it and rolling it over into a new property and rent it to our son, basically with the idea that he would rent to own. I am saying this because we have offered to help each of our kids with a down payment and this could potentially serve as the down payment. But I also have no idea how we could go about doing this.

You can use 1031 exchange to sell your current property and roll the proceeds into another "like kind" property. Benefit is that you defer cap gains. You must file a form to report the exchange to the IRS, and you must close on the purchase of the replacement property within 180 days of the sale of the old property. The replacement property must be of equal or greater than value than current property. There are other additional considerations.

Here's a summary of the 1031 exchange rules:

https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

 

[captain3d]

Presuming you live in CA for tax purposes you will end up paying around 35% total in fed tax, depreciation recapture, ca income tax and sellers fees.

Maybe wait for a low income year to sell

 

[SecondAttempt]

Hi, I am not real estate savvy, but my dh and I are thinking of selling our rental property. It's in the CA Central Valley. It was mine before I married.

I would like people to share things we should consider before we decide to do or not do it.

A little background.....
Condo is worth about 180-200K, per Zillow and Realtor.com. No idea how accurate this is. HOA is $300, management fee is $65 and property tax about $100 (all per month). Currently renting for almost $1200 per month. It's been paid off quite a while and while I'm not sure of the exact terminology, it has been depreciated to $0 over the years. I paid just under 50K for it. We recently (2-3 years ago, before current renter) updated the unit, as it was needed and previous renters absolutely trashed the place.

Rents may be slightly higher, but philosophically, we don't like to raise the rent on current tenants. For one thing, on such a low rent, it takes quite a while to recoup costs if someone moved. I also like to think we are helping someone out by not raising the rent.

I'm a little confused about what the tax rate would be. When I read articles, I feel like they can be confusing. I'm anticipating our AGI will be about 180K, but not 100% sure, because this year is a funny one, income wise.

I know selling it will impact my dh's medicare costs. (he turns 65 in October 2023).

I have thought about selling it and rolling it over into a new property and rent it to our son, basically with the idea that he would rent to own. I am saying this because we have offered to help each of our kids with a down payment and this could potentially serve as the down payment. But I also have no idea how we could go about doing this.

What else should I think about?

Thank you.

I'm not totally up to date on the rules but I think if you can stop renting for 2-3 years and make it a second home, even if you only visit once or twice a year you might be able to avoid capital gains taxes. That could save you more than the lost rental income.

Honestly, I would hire a CPA to run the numbers because I put together a quick spreadsheet based on a few assumptions and it seems to be a close call in my opinion. A CPA might save you thousands for a small fee. Seems like you are netting about 4-5% so it is not dead money but also not lucrative.

 

[RetireBy90]

I'm not totally up to date on the rules but I think if you can stop renting for 2-3 years and make it a second home, even if you only visit once or twice a year you might be able to avoid capital gains taxes. That could save you more than the lost rental income.

Honestly, I would hire a CPA to run the numbers because I put together a quick spreadsheet based on a few assumptions and it seems to be a close call in my opinion. A CPA might save you thousands for a small fee. Seems like you are netting about 4-5% so it is not dead money but also not lucrative.

I believe first point that you have to make it your primary residence and live there for 2 of 5 years before you sell. Again I believe, if you sell a second residence not used for rental then you still owe cap gains on any profit.



2nd point is more important. I recently did the same, analyzed our rental in Reno and consulted with a local CPA. For about $200 and a phone call and email, they answered all my questions and laid out the tax consequences of outright sale, 1031 exchange, and 1031 exchange with conversion to our primary residence. All the options will either cost a significant tax bill or significant investment making another home our primary residence. I agree the CPA is the way to go. Lots of details to consider and each situation has some unique characteristics. Couple hundred could be another great investment.

 

[pb4uski]

I'm not totally up to date on the rules but I think if you can stop renting for 2-3 years and make it a second home, even if you only visit once or twice a year you might be able to avoid capital gains taxes. That could save you more than the lost rental income.

Honestly, I would hire a CPA to run the numbers because I put together a quick spreadsheet based on a few assumptions and it seems to be a close call in my opinion. A CPA might save you thousands for a small fee. Seems like you are netting about 4-5% so it is not dead money but also not lucrative.

Wrong. There is no capital gain exclusion for a second home... only for a primary residence.

 

[euro]

First, I wouldn’t let the tax tail wag the dog. I’m all for minimizing the taxes, but if you are ready sell now, then go ahead and sell.
I would start by talking to a (or better:several) realtors to find out what the market value of the property is. Zillow, Realtor.com etc are often wrong by tens or hundreds of thousands! Don’t rely on those. You can even get an official appraisal for a few hundred dollars (I think a good realtor is all you need though).
Yes, you can do 1031 exchange, but that means you will still own a rental property when all is said and done - just a DIFFERENT rental property. So, not sure that really addresses the problem you are trying to solve.
Consulting a CPA is a good idea. Depending on your specific situation, it may be better told off on selling and wait for a lower income year. But again, you may pay less taxes that way but if the market deteriorates in the meantime, you may also get a lot less cash for your property, so everything has its risks.

 

[Dash man]

Hi, I am not real estate savvy, but my dh and I are thinking of selling our rental property. It's in the CA Central Valley. It was mine before I married.



I would like people to share things we should consider before we decide to do or not do it.



A little background.....

Condo is worth about 180-200K, per Zillow and Realtor.com. No idea how accurate this is. HOA is $300, management fee is $65 and property tax about $100 (all per month). Currently renting for almost $1200 per month. It's been paid off quite a while and while I'm not sure of the exact terminology, it has been depreciated to $0 over the years. I paid just under 50K for it. We recently (2-3 years ago, before current renter) updated the unit, as it was needed and previous renters absolutely trashed the place.



Rents may be slightly higher, but philosophically, we don't like to raise the rent on current tenants. For one thing, on such a low rent, it takes quite a while to recoup costs if someone moved. I also like to think we are helping someone out by not raising the rent.



I'm a little confused about what the tax rate would be. When I read articles, I feel like they can be confusing. I'm anticipating our AGI will be about 180K, but not 100% sure, because this year is a funny one, income wise.



I know selling it will impact my dh's medicare costs. (he turns 65 in October 2023).



I have thought about selling it and rolling it over into a new property and rent it to our son, basically with the idea that he would rent to own. I am saying this because we have offered to help each of our kids with a down payment and this could potentially serve as the down payment. But I also have no idea how we could go about doing this.



What else should I think about?



Thank you.

If you sell, your tax bill will include a 15% (or 20%) tax on the capital gains, plus a recapture tax of a maximum of 25% on the depreciation you took on the property. Depreciation recapture is taxed as ordinary income, but capped at 25%.

 

[38Chevy454]

I agree that you can probably get some valuable advice from a local CPA that can help analyze all the variables (income taxes, cap gains, medicare, IRMAA, 1031, etc) to determine what is the best option. It seems to me that you would prefer to just get out of the rental business. If the end result you desire is to help kids with housing, it may be best to just accept the cap gains hit for this year and have the money available when your kids are needing it. Rather than a forced rent to own place that may not be the best choice for one kid.

One thing is all of your remodeling expenses for the updating couple years ago are added to your basis. Small offset to some of the cap gains, but every little bit helps.

 

[Dash man]

We have a townhouse that we rented out for year that has appreciated about $300k. We were going to sell a few years ago, but were hesitant because of the taxes we’d have to pay. We ended up letting our son’s family move into it since they needed more space with twins. He’ll inherit it when we pass and will get the stepped up basis. We considered gifting it to him, but then he’d get the cost basis and depreciation that goes with it. I suppose since it’s his permanent home he’d get the $250,000 exclusion after two years, but he’d still owe some tax.

Consulting a CPA is a good move. Please let us know what you ultimately do.

 

[OldShooter]

... Rents may be slightly higher, but philosophically, we don't like to raise the rent on current tenants. For one thing, on such a low rent, it takes quite a while to recoup costs if someone moved. I also like to think we are helping someone out by not raising the rent. ...

That's a fine song and dance act, but a buyer is not there for the entertainment; he wants to see what the numbers look like. I'd be raising the rents ASAP or, a distant second choice, preparing a proforma with market rents backed up by a very thorough market analysis.

As others have suggested, finding a 1031 exchange would be my highest priority. Ideally the new asset would be outside CA and outside other problematic states like IL. Hard to know what this abortion thing is going to do to property values in prohibition states but for good luck I would avoid them too.

 

[Earl E Retyre]

We own a rental property and were thinking of selling - however decided to wait another 6 months after talking with our real estate agent. Six months ago, houses were selling way above asking price in a single day on the market with many offers. Our realtor said that now it is a strange time in that houses are being listed without even a single showing for the past several weeks. More houses are hitting the market and asking prices are being reduced. She recommended we extend the lease for another 6 months and see what the market is doing then. And, this is our realtor, who only makes money if we sell. We also have periodically been seeing what Open Door would offer us and have noticed a significant drop in offer value.

We are not in California and your location may be completely different. But you might want to make sure the market is still good right now.

The theory is that the recent raise in interest rates is what is causing the real estate market to do this.

 

[Spock]

I've been digging into selling rental properties (1031b exchanges are next to impossible until the market cools off) and there are a lot of IRS restrictions with buy-from/sell-to/rent-to family members. When renting to family members you have to document you are receiving competitive market-rate rents or the IRS considers it personal use.

And here comes an additional 87,000 IRS agents that need to find the budgeted additional revenues... find a CPA that is experienced in rentals.

 

[tryan]

Did you live in the condo 2 of the last 5 years??

if you have a capital gain from the sale of your primary residence, you may qualify to exclude up to $250,000 of that gain for individuals and up to $500,000 if you file a joint return. To qualify for that exclusion, you must meet the ownership test and the use test.

The 2-out-of-five-year rule is a rule that states that you must have lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don’t have to be consecutive and you don’t have to live there on the date of the sale. You can exclude this amount each time you sell your home, but you can only claim this exclusion once every two years.

 

[Doingitwrong]

Hi, I am not real estate savvy, but my dh and I are thinking of selling our rental property. It's in the CA Central Valley. It was mine before I married.

I would like people to share things we should consider before we decide to do or not do it.

A little background.....
Condo is worth about 180-200K, per Zillow and Realtor.com. No idea how accurate this is. HOA is $300, management fee is $65 and property tax about $100 (all per month). Currently renting for almost $1200 per month. It's been paid off quite a while and while I'm not sure of the exact terminology, it has been depreciated to $0 over the years. I paid just under 50K for it. We recently (2-3 years ago, before current renter) updated the unit, as it was needed and previous renters absolutely trashed the place.

Rents may be slightly higher, but philosophically, we don't like to raise the rent on current tenants. For one thing, on such a low rent, it takes quite a while to recoup costs if someone moved. I also like to think we are helping someone out by not raising the rent.

I'm a little confused about what the tax rate would be. When I read articles, I feel like they can be confusing. I'm anticipating our AGI will be about 180K, but not 100% sure, because this year is a funny one, income wise.

I know selling it will impact my dh's medicare costs. (he turns 65 in October 2023).

I have thought about selling it and rolling it over into a new property and rent it to our son, basically with the idea that he would rent to own. I am saying this because we have offered to help each of our kids with a down payment and this could potentially serve as the down payment. But I also have no idea how we could go about doing this.

What else should I think about?

Thank you.

The IRS operates in a world of substance over form for situations just like this.
You can't 1031 a rental property in exchange for an investment property and turn around and sell the new property and treat it as a capital asset. All of the tax attributes of the old rental house would carry over to the new place.
'Rent to own' is an installment sale. In an installment sale, you have to recapture 100% of the depreciation allowed/allowable in the year of sale even though you didn't receive the cash.
You could let your son stay in the house for a year or two (there's no clear line) without collecting rent and convert it into investment property.
Or you could sell the condo, pay the taxes, and give the net to your son as a gift (file Form 709 and use up a little of your joint $25 million+ lifetime exemption).

 

[Magus]

That's a fine song and dance act, but a buyer is not there for the entertainment; he wants to see what the numbers look like. I'd be raising the rents ASAP or, a distant second choice, preparing a proforma with market rents backed up by a very thorough market analysis.

As others have suggested, finding a 1031 exchange would be my highest priority. Ideally the new asset would be outside CA and outside other problematic states like IL. Hard to know what this abortion thing is going to do to property values in prohibition states but for good luck I would avoid them too.

Yes raise the rent. I try to keep it below market for good tenants but you don’t need to leave the rent the same - property tax, insurance and maintenance costs go up every single year. Your tenants know this. Stay a bit below market and you’ll be fine. Your implied cap rate is around 3.5% assuming 100-120/month in long term maintenance. Not that great for a rental - but I don’t know what market is for rents on the property so market rent may be more in line with 5-7% in most of the rest of coastal world, bit below flyover.

(Hard to believe the bold stays up on this forum when suggesting current tax brackets stay as is past 2026 is considered highly political)

 

[SecondAttempt]

Wrong. There is no capital gain exclusion for a second home... only for a primary residence.

Yep, I figured that out.