Sell my rental property?

[John the third]

I rarely post, but the few times I do it seems I get ideas I hadn't previously considered. So, let's see what you all think about this situation: I own a rental house (sgl-family home 3br/2ba/2car) in a good stable community in northern Palm Beach County, FL. I bought it for $220k, can sell it for $535k. Currently, I net about $10k/year in after-tax rental income. I could sell it to the current tenant at a fair price and pay the large tax due. Yes, I've taken into account 25% tax on depreciation recapture, 15% LTCG tax, and a little bit of NIT since it'll put my MAGI over $200k. I'm 61, so if I sell in 2026, my IRMAA when I'm 65 won't be impacted. My math shows I'll have $350k cash-in-hand when I sell and pay closing costs and ~$52k in taxes. In a simple evaluation, I assume I could buy a bond or some other moderately safe instrument which gives me a 4.5% return on the $350k -- thus, generating about $15.8k of income ($13.5k after-tax based on 15% tax). My simple evaluation -- after-tax earnings from owning the home is $10k/yr vs selling the home and investing the proceeds is $13.5k/yr. -- Thus, $3.5k/yr more if I sell it. I realize if I sell now, I'll forfeit any value appreciation that will occur over time. But my simple mind says that's ok because FL may be in a real estate bubble right now and insurance costs and property taxes are a big unknown. Plus, selling it will put an extra $3.5k/yr of cash in my hand which enables me to leave my 401k investments invested longer. I'm leaning towards selling this property in 2026 -- Am I missing anything?

 

[COcheesehead]

RE runs in cycles and there are signs at least where I live that prices have flattened.
If you sell, you have liquidity and peace of mind. If you don’t you may get more down the road, but you also may not.

 

[FlaGator]

Not that I can see. I would sell and simplify my life.

 

[imjustawarrior]

I would sell. The return is not worth the effort. I really like having ETF/Mutual Funds instead of real estate. Owning just 1 rental is risky because of lack of diversification. I like not having to manage a rental. Real estate is not as easy to liquidate.

I don't see your age or employment status, but the bump in income could impact IRMMA or ACA subsidies or other things.

 

[dobig]

I think it's pretty obvious what you should do reading the numbers. And the icing on the cake is you don't have any more tenants to deal with or those late evening calls telling you the hot water heater is out.

I follow the Florida real estate market. If it were me, I'd be listing sooner rather then later. The current trend is in the wrong direction and I'm not seeing any relief from sky rocketing insurance. In fact as I'm sure you're well aware, the opposite. The property insurance issue along with the rapid increase in listings would make me want to do something yesterday. If there are specific reasons you need the closing to happen in 2026, make that part of the listing agreement. We're close enough that it shouldn't be an issue.

 

[COcheesehead]

I would sell. The return is not worth the effort. I really like having ETF/Mutual Funds instead of real estate. Owning just 1 rental is risky because of lack of diversification. I like not having to manage a rental. Real estate is not as easy to liquidate.

I don't see your age or employment status, but the bump in income could impact IRMMA or ACA subsidies or other things.

From the OP
‘‘I'm 61, so if I sell in 2026, my IRMAA when I'm 65 won't be impacted.”

 

[RetiredHappy]

Another vote for sell it! Besides it is "just" money, which is a positive for selling, it simplifies your life. I cannot give advice on investments, other than stay away from rental properties unless you make a real business of it.

 

[dobig]

One other note to consider if you do decide to sell. I would think about an allocation of 50% bonds and 50% dividend growth etf such as SCHD. Pays a 3.8% dividend on some of the best US companies, dividends are qualified and over the past 13 years dividend growth is over 300% as is the stock price. That should make up for any lost appreciation on your RE and you should outpace inflation with the rising dividends,


A few months back one of Goldman Sachs head investors was on CNBC explaining how in 13 of the past 14 recessions since 1940 the average drawback in S&P dividends is less then 1%. The exception being the Great financial crisis. Dividends decreased 24%. I believe the recovery timeframe was less then 24 months but not firm in my recollection.

Just a thought.

 

[junkanoo]

I would consider selling it over two years to reduce the tax bite. As this is investment property, there are multiple ways to do this, the simplest being an installment sale. That could easily be done say over December/January to reduce buyer default issues. A quick Internet search will uncover other options.

 

[iloveyoga]

The more I have simplified in retirement, the happier I have been and it will make things easier for others down the road.

 

[imjustawarrior]

From the OP
‘‘I'm 61, so if I sell in 2026, my IRMAA when I'm 65 won't be impacted.”

I think I need a second cup of coffee this morning.

 

[HawkeyeNFO]

I'd sell. Had a similar situation several years ago, was making decent cash-flow, but given the average market return, I'm better off financially without the rental property, and happy to not have any worries about tenants, storm damages, regular maintenance, etc. Only reasons I could see to keep it is if you plan to move in or give it to your kids.

 

[mf15]

You seem to have the selling costs accounted for. I say sell while healthy and not yet on medicare.. Had to sell mine in 2022 at 74, due to health problems. IRMAA for both of us,was a 12K hit,she is not a nice person.
oldmike

 

[gauss]

I did something similar two years ago. When long term Government bond rates were over 5%, and property values were high, I said to myself -- this is the time! and I pulled the trigger.

I took the 100k LTcap gain hit and now it is behind me. I wasn't actively renting it since Covid, so this was all the incentive that I needed.

Of course I won't get any capital appreciation on my government bonds (I plan to hold until maturity) , but that is what my equities are for. The unit was paid off with no mortgage so there was no real estate "leverage" in the deal for me any more either.

Got it off my books a few years before IRMMA measurement begins, so that also played nicely for me.

-gauss

 

[OldShooter]

WADR I think your list of options is incomplete. What will your estate look like? Remember that your taxpaying heirs will get a basis step-up, thus dodging the taxes you're so carefully analyzed.

The low hassle tax dodge might be to hire management and go personally into a hands-off mode. Sure, the management costs will probably hurt, but in the end paying those fees might be cheaper than paying state and federal taxes on the gains.

 

[COcheesehead]

I had a moderately large commercial property and sold it in 2020. The value of the property almost tripled while I owned it. I wrote a big check to the government and never looked back. It all took place outside of ACA (was on Cobra at the time) and years from the IRMAA look back. Glad to not have to worry or think about it any longer and the proceeds went to work for me immediately.

 

[Kings over Queens]

I've come to the realization that I am not cut out to be a landlord, hence, I no longer hold rental property and no longer have the desire to hold rental property. In your case, the math works to do something else with the money, and so in that case, I'd also agree with selling it for something less difficult to manage in terms of investments.

 

[pb4uski]

I would consider selling it over two years to reduce the tax bite. As this is investment property, there are multiple ways to do this, the simplest being an installment sale. That could easily be done say over December/January to reduce buyer default issues. A quick Internet search will uncover other options.

Good idea if it will really reduce the tax bite. Could you do an installment sale on Dec 31 with a 50% down payment and a note from the buyer and then an installment on Jan 2 that pays off the note from the buyer? Splits the gain between two tax years.

 

[surprising]

I've come to the realization that I am not cut out to be a landlord, hence, I no longer hold rental property and no longer have the desire to hold rental property. In your case, the math works to do something else with the money, and so in that case, I'd also agree with selling it for something less difficult to manage in terms of investments.

In my experience, rents don't keep up with appreciation, so after a certain amount of time, the numbers just won't work if you're looking for maximum return. However, it still has utility as a source of diversification.

 

[hesperus]

If your goal is chill, selling is kinda hard to argue with. You’re already thinking about insurance and property taxes, and in FL that stuff can go sideways fast. I used Time to Close Title on a deal down here and it reminded me how many random costs show up around a sale even when everything goes smooth. If you do keep it, I’d be honest about the boring stuff, vacancy, a roof or AC at the wrong time, and whether that 10k is still 10k after you stash some money for repairs.

 

[38Chevy454]

Looking at ROI, $10K on $220K is 4.55%. ROI $10K on the potential value of $535K is 1.87%. Add in the risk of a big repair, the low liquidity, and the unknown insurance picture; it seems to me that having a tenant buyer is a great time to sell where you can save the realtor fees Maybe give the tenant buyer a break on the cost to split the realtor savings to sweeten the deal for them. Invest the proceeds according to a timeframe the money is for. I assume this is longer term money, so would go for something like an equity fund or similar. Using long term stock market return rate of approx 9% per year average. Take the tax hit and move on with a simplified savings profile.

 

[Souschef]

When I married, I moved into a home DW had bought. I hired a management company and rented out my condo.
The first few rentals worked out, multiple years occupancy, but then I had a one year rental.
When the dust settled, I netted $400 for the year. At that point I put the condo up for sale. It was a great feeling to be out from under that condo.

 

[nwsteve]

Looking at ROI, $10K on $220K is 4.55%. ROI $10K on the potential value of $535K is 1.87%. Add in the risk of a big repair, the low liquidity, and the unknown insurance picture; it seems to me that having a tenant buyer is a great time to sell where you can save the realtor fees Maybe give the tenant buyer a break on the cost to split the realtor savings to sweeten the deal for them. Invest the proceeds according to a timeframe the money is for. I assume this is longer term money, so would go for something like an equity fund or similar. Using long term stock market return rate of approx 9% per year average. Take the tax hit and move on with a simplified savings profile.

Your math and our ages (77/78) convinced me to sell our 3 rental properties. Last ones closed late Sept. We converted all proceeds to DSTs providing a minimum of 5+%/yr bit more likely closed to 8/9% at liquidation which is now much easier for heirs to get step-up. Eliminated substantial depreciation recapture tax, more than offsetting any reduction from converting to DSTs. DSTs also add a nice monthly bump to assurred monthly income. YRMV

 

[stephenson]

Your math and our ages (77/78) convinced me to sell our 3 rental properties. Last ones closed late Sept. We converted all proceeds to DSTs providing a minimum of 5+%/yr bit more likely closed to 8/9% at liquidation which is now much easier for heirs to get step-up. Eliminated substantial depreciation recapture tax, more than offsetting any reduction from converting to DSTs. DSTs also add a nice monthly bump to assurred monthly income. YRMV

nwsteve, which of the QI and DST companies did you use? No regrets?

 

[nwsteve]

nwsteve, which of the QI and DST companies did you use? No regrets?

I used Premier 1031 for QI & JRW Investments, Chris Rogers who leads their due diligence efforts. Most of our dst are Exchange Right and All Cash portfolios which are predominently made of net lease properties to BBB and better corporations.
No regrets and DW is especially happy not to have to be concerned with possibilities of dealing with property management and tenants. Every transaction went smoothly and 1031 deadlines fully observed. For me, tricky part was choosing to be sure we met required leverage requirements with dst chosen