Real estate strategy advice sought

[laurence]

Hey everyone, old timer here seeking advice. North county San Diego, bought a rental condo back in 2013 for 345k. While it cash flows positive (about 2k a month), it's seen tremendous appreciation and currently would sell between 750-800k and we owe about 100k @/3.125%. Now that we are about 4-5 years from retirement, we are starting to discuss where we'd like to live and have settled on getting a small condo in downtown La Jolla area, somewhere between 900k-1.5 million is what we are seeing currently for what would make us happy but wouldn't break us financially. Our current suburban home would sell for about 1.3 and we owe a little over 400k on it @/2.75%.

Now a lot can happen in the market over the next few years obviously but I'm toying with the following options:

1) 1031 exchange the rental for our La Jolla property and rent it for a couple years to be legal then moving in and renting our current primary home.

2) Waiting until retirement and selling primary and buying La Jolla condo then, just keeping the rental as is and let the kids inherit it on a stepped up basis while getting modest passive income to supplement retirement.

Waiting until retirement like option 2 then selling the rental a year+ into retirement and just paying the tax bill while taking no withdrawals from retirement accounts (thus no other taxable income) and paying off the La Jolla condo. I'm strongly considering this option because of the way it further simplifies our life, and the tax hit doesn't seem THAT awful.

We have maxed our 401ks for decades, have kids college fully funded elsewhere, will have 2-3 years living expenses in HYSA on top of that and no other debt so no dirty details to worry about. I'd love to hear your advice on pros and cons or things I'm not thinking about! Thanks!

 

[Koolau]

Only thing I can think of is to figure how you might keep your low cost mortgages! 3.125% and 2.75% seem like a real "steal" at this time. I'm sure someone here smarter than I can comment on your actual questions, but those interest rates are incredible at this point. Would be great to hang onto them.

It sounds like you can fund your retirement with little problem. Sorry I don't have any actual advice for you. Aloha.

 

[laurence]

I should have added that 2.5 years ago I switched jobs for a substantial increase and now our HHI is about 800k (RSUs are amazing) and likely will stay near that for at least 3 more years possibly dropping to 500-600k for the last year or two before retirement. So we are backdoor roth-ing and piling up in HSYA as fast as we can. I am considering bringing cash in from there to assist and minimize the mortgage.

 

[laurence]

Only thing I can think of is to figure how you might keep your low cost mortgages! 3.125% and 2.75% seem like a real "steal" at this time. I'm sure someone here smarter than I can comment on your actual questions, but those interest rates are incredible at this point. Would be great to hang onto them.

It sounds like you can fund your retirement with little problem. Sorry I don't have any actual advice for you. Aloha.

I know! It feels like golden handcuffs!

 

[Koolau]

I know! It feels like golden handcuffs!

Heh, heh, solid gold - not plated!

 

[calmloki]

Tax rates sting. We've been divesting of our rentals, carrying contracts on them and paying the tax on profit as it is received. Still keeps our upper rate high, but we pay that rate on fewer dollars. Sounds like you have and will have enough, so I vote to 1031 the current rental into the La Jolla condo and rent it out till a bit before retirement, then do a full refresh on it and move in. Then sell your primary house, taking the tax savings, and retire rental free, letting the kids inherit the La Jolla place at stepped up basis.

I don't know how involved you are in your rentals, but at 75, even with greatly reduced management load, I'm not convinced I'm getting full measure of joy being a landlord.

 

[Koolau]

I don't know how involved you are in your rentals, but at 75, even with greatly reduced management load, I'm not convinced I'm getting full measure of joy being a landlord.

We did the "rental" thing back in the 80's/90's just to hold a place for our retirement. We used a rental agent and we STILL felt "owned" by our rental. I would never want a rental in retirement but that's just me do YMMV.

 

[surprising]

1) 1031 exchange the rental for our La Jolla property and rent it for a couple years to be legal then moving in and renting our current primary home.

See Pub 523 about 1031 exchange. Looks like you need to have it as a primary for 5 years now before you can claim any tax exclusion. Also if a property has ever been a rental, you can never claim the full exclusion anymore, it will be a fraction of (years of non rental) / (total years of ownership).

 

[laurence]

Tax rates sting. We've been divesting of our rentals, carrying contracts on them and paying the tax on profit as it is received. Still keeps our upper rate high, but we pay that rate on fewer dollars. Sounds like you have and will have enough, so I vote to 1031 the current rental into the La Jolla condo and rent it out till a bit before retirement, then do a full refresh on it and move in. Then sell your primary house, taking the tax savings, and retire rental free, letting the kids inherit the La Jolla place at stepped up basis.

I don't know how involved you are in your rentals, but at 75, even with greatly reduced management load, I'm not convinced I'm getting full measure of joy being a landlord.

See this is what I was thinking, even with a rental agency managing it I am dealing with it a lot - water heater goes out, garbage disposal, oh the renters are moving out, here are the 3 people who applied to the listing, they have a pet Komodo dragon, etc. etc. plus I worry about the disaster that is insurance in the state right now. State Farm dropped the policy on our common areas and we are getting a 4k assessment from the HOA for the new, more expensive insurance. I just worry with the 1031 exchange that we have to hurry and take what we can get vs a home we'd really love to live in.

 

[laurence]

See Pub 523 about 1031 exchange. Looks like you need to have it as a primary for 5 years now before you can claim any tax exclusion. Also if a property has ever been a rental, you can never claim the full exclusion anymore, it will be a fraction of (years of non rental) / (total years of ownership).

I will look into this - are you saying it has to be a rental for 5 years before you can move in, oh wait or do you mean we can't take our property tax with us from our primary home?

 

[surprising]

I will look into this - are you saying it has to be a rental for 5 years before you can move in, oh wait or do you mean we can't take our property tax with us from our primary home?

If you plan on eventually selling the rental turned into primary, then you have a bunch of new rules to follow in order to get any of the tax exclusion on primary sales - ie $500K of gains tax free on the sale for married filing jointly. So having it as a rental for 2 years doesn't seem to be useful anymore. You still have to pay the depreciation recapture of the original rental property when you convert to primary. You still have to factor in years as rental when calculating the gains exclusion.
This is how I interpret pub 523 anyway. There's a lot of mumbo jumbo so I could be missing something important.

 

[Winemaker]

I vote the 1031 exchange.
When I 1031ed, it had to be a rental for at least 2 years before you could make it a personal residence , IIRC. We had no intent on making it our residence however. And then as I understand, you must have it as a personal residence for 5 years before you can shelter the capital gain. Call one of the 1031 exchange businesses, and their attorney or legal assistant will answer your questions about what you can do.

 

[ivinsfan]

You have a lot of moving pieces on the board. A move from a SFH in the suburbs to a condo is a big lifestyle change. I'd lean toward the path that calmloki suggests as it gives you more time to be certain of what's going to work for you.

 

[laurence]

Ok thanks everyone I have some research to do but I’m pointed in the right direction.

 

[Texas Proud]

I owned half of a rental back in the 80s when RE was bad in Texas... I did not do much work but IMO owning RE and doing ANY work was not something I was interested in doing...

If you want to pay someone to do that for you then that might be good... I just read so many horror stories about getting someone out of a rental or where they trash the place for over $100K... I would rather own stocks or ETFs and just live with the ups and downs...

 

[Koolau]

Recent events surrounding Covid and the treatment of land lords makes me think owning rentals may be fraught with danger. I'd never do it again - if for no other reason than that gummints can upend your best laid plans on a whim.