Highly appreciated rental house in HCOL area?

[Ballhawker]

I'm 58 and approaching early retirement while my DW is my DW just turned 59 and is happy working at her state job with no interest in retirement at this point.

We own a rental house free and clear and have used up all depreciation so minimal tax benefits. Bought the house in 2006 for $360k and Zillow now says it's worth $909k. Rent is currently $2800 per month.

I am considering three options - 1. sell it, take gains and the tax hit, and invest in REIT or good dividend paying ETFs, 2. 1031 exchange into multiple higher cash flow LCOL rentals out of state and hire a management company, or 3. Just keep it for a few more years even though the ROI isn't that great.

The house is really showing it's age. Fairly frequent trips to fix this or that or install a new appliance. It will need new windows and a kitchen remodel fairly soon.

Any ideas or recommendations welcome! Thanks.

 

[38Chevy454]

What are your plans for retirement? If it involves being out of town for extended travel, you might want to consider getting rid of the rental and have no effort investment in an ETF or equities. I prefer freedom, and having a rental is like a part time job that keeps you doing repairs and maintenance. Or you can offload the efforts to a prop mgmt, albeit at a fee. Plus you mentioned needing to do some upgrades or repairs on the rental. My feeling is sell it and let the new owner decide how they wish to upgrade and remodel to their budget and tastes.

I have had some rentals in the past, I am glad to not have those now.

 

[freedomatlast]

I faced the same thing recently on one of mine and chose to do some updating and remodeling and then rented it out for substantially more than before the remodeling. Didn't want to take the nasty tax hit, so I kept it instead of selling and I'm glad I did at this point. Even though I no longer have depreciation on the house itself, I now have depreciation on the new appliances, the remodel and the new furnace.

 

[Spock]

since you're considering replacing it with REITs, an attorney once suggested 1031 into a Delaware Statutory Trust. Too exotic for my blood but might be worth it for you with the size of the tax hit.

 

[LateToFIRE]

I have a similar situation. Was planning to just take the tax hit and be done. Has anyone looked at CRUT's (Charitable Remainder Unit Trusts)? You transfer the r.e. to the trust, the trust sells the property, pays out distributions (taxable as income) at some IRS predetermined %, the remainder goes to charities when you die.

Since a nice chunk of our estate will go to charities, was thinking this might be a viable option to defer the capital gain tax and basically pensionize the proceeds.

 

[nwsteve]

I have a similar situation. Was planning to just take the tax hit and be done. Has anyone looked at CRUT's (Charitable Remainder Unit Trusts)? You transfer the r.e. to the trust, the trust sells the property, pays out distributions (taxable as income) at some IRS predetermined %, the remainder goes to charities when you die.

Since a nice chunk of our estate will go to charities, was thinking this might be a viable option to defer the capital gain tax and basically pensionize the proceeds.

If CRUT of interest, check with your University's Foundation offerings--can be pretty competitive. Not done it yet with our 3 units but on the list--we have excellent management company so units are largely on auto

 

[Ballhawker]

since you're considering replacing it with REITs, an attorney once suggested 1031 into a Delaware Statutory Trust. Too exotic for my blood but might be worth it for you with the size of the tax hit.

I looked into DSTs but there is a fairly hefty commission of roughly 10% and they turn over every 7 years or so - each time with another added commission cost.

 

[LateToFIRE]

If CRUT of interest, check with your University's Foundation offerings--can be pretty competitive. Not done it yet with our 3 units but on the list--we have excellent management company so units are largely on auto

Thanks - good suggestion, though my uni wasn't one of the charities in our estate plan - they have an endowment so massive I don't think they even know how to spend it, other than constantly putting up new buildings, though doesn't keep them from annually sending old classmates after me for fundraising

That fact, combined with my graduating with soul-crushing student loans that made it tough for us to begin saving until later in life has forever poisoned DW against us ever donating more than $100/year.

 

[JDARNELL]

We just listed two today that have experienced what you are seeing. For us we are probably going to bite the tax bullet and be done with it. Our ROI is good based on what we have in them but when you look at the ROE with the run up it isn't good. So we might as well get that equity to work in something a little simpler. The properties have more than served their purpose and we want the simplification and at this point are willing to give up the ~200K in taxes that would be left over in the estate anyway for the simplification now. We still have 4 more that we plan on 1031 in the next 2-5 years. We are still a little Jr to look at CRUTs right now.

 

[cathy63]

In a similar situation last year, we sold our rental condo. Even though it was walking distance from our current home and we had a good tenant, the HOA was annoying and it was just too much of a pain to deal with when we want to be traveling more. We considered getting a property manager and finally just decided to be rid of it.

The tax bite is painful though. We paid enough in estimates to reach the safe harbor last year and set aside the rest of the tax in high yield funds. We just got an extension to June this year (FEMA disaster area), so it'll keep earning for another couple of months before we have to hand it over.

 

[captain3d]

1031 into several cheaper properties and sell them off one by one in different years to lower taxes.

Remote managers have been good enough for me.

 

[Winemaker]

Real estate is depreciated over 27.5 years and if you bought in 2006, you still have some years left to make a final decision. I have done a 1031 before, they really help. It's a lot of work to do and you have to find the right property/properties that work for your situation. Remember the replacement property has to be worth more than the relinquished property, as you cannot receive any boot. (excess cash), for the exchange to pass muster.

 

[DJRR]

If like here, I would take advantage of a tight market with multiples and no inspections. Getting out without sinking $100k in repairs is a win for me. However, I also grew up watching "The Money Pit" and consider paying taxes to be a good thing (profit).

 

[Ballhawker]

1031 into several cheaper properties and sell them off one by one in different years to lower taxes.

Remote managers have been good enough for me.

Oh wow I hadn't thought of the tax benefits of having multiple properties and then selling them in different tax years. Great idea! Thank you. I am thinking about looking at possibly 1031 to a lower cost of living area and purchasing a multi-family or multiple modest rental homes to increase income.

 

[Ballhawker]

If like here, I would take advantage of a tight market with multiples and no inspections. Getting out without sinking $100k in repairs is a win for me. However, I also grew up watching "The Money Pit" and consider paying taxes to be a good thing (profit).

Good point, gotta git while the gittin's good as they say.

 

[Happyras]

I spent the morning at my trashed rental house, tearing out the kitchen cabinets while the junk haulers collected $2800 to trash out the mess left by my current eviction. This is the second eviction in a row, and this time i hired a property mis-manager 2 homes down, to take advantage of me costing me thousands in legal fees, as they did not even attempt to speak to the tenants to get them out. The let my fully restored home be trashed over the 3 years they mis-managed. Never really inspected or called them out for damages.
Wow, I am in the middle to negotiating the insurance settlement, currently 56K after depreciation hoping for a bit more. I intend to sell this mess As-Is, but I have a new gas furnace I am installing and the home has a new metal roof. With the last two evictions I have lost significantly more money than any of the little rent and deposits collected. I have offers from questionable flippers, but I think I can hold out for someone really interested in the investment.

We own a commercial property, triple net leased, next to this home and I had hoped to do better with the 2 together as they are downtown commercial zoned. Unfortunately in our state the tenant laws are so in favor of the tenant, it is just no longer a game for the small player.

My advice to the OP is to sell it and run while you can get away from it. It will only get worse as more states adopt a more socialist view of law.