Sell or rent out my primary house - .5M dollar question

[dvalley]

So the gf and I are thinking about moving in together. Her house is bigger, nicer so it's the natural choice for consolidating. That leaves me with the option of either renting my house out or selling it and putting money into the market.

My mortgage rate is 3.75%, have $270k left on the mortgage. As of right now it's worth about $600k. A few questions and thoughts that run through my mind:

1. Rent it out, at least for a yr or two, in case things don't work out with the gf (hey it happens! I never thought I'd get divorced but did). I might miss the decent RE market though. On the other hand don't feel like dealing with renters and them messing up the house.

2. Selling would also allow me to not have the 3.75% interest, instead I can make about 3% in a MM account...most likely I'll invest 2/3rds into the market.

3. But if I sell it, it *might* be hard to get back into the CA real estate again.

4. The house only appreciated 7% since I bought it. Which is pretty good but not compared to the stock market's 237% since then!! But you can't live in stocks.

 

[pb4uski]

I would sell.... residential real esate rentals can be a PITA... also, since up to now it has been your personal residence then any gain would be tax-free... if you rent it and then later sell it gets complicated, you have depreciation recapture, etc. Ugh1

 

[thumbs]

I feel like this is less of a financial question. Do you want to be a landlord? It's certainly not for everyone. Also, how in love are you with the house? If things didn't work out with the girlfriend, would that be the house you would want to move back into? Or could you be just as happy in another one?

 

[Aerides]

In your shoes I would do nothing, thru EOY, then decide by January 2020:

Move in with her, see how things go. If it's a bad idea for your relationship, you'll probably find that out pretty quickly, and then if you've already rented the place you're in a pickle for months.

Typically know within 6 months, adding in the holiday period which brings in more family and stress to deal with. If you make it through that and are still giddy, sell then (or rent then if the math really works, but understanding all the risks).

If then later you decide she's a keeper, I'd recommend you sell both and buy something new to both of you to start your lives together.

 

[dvalley]

All excellent advice. Great point about paying taxes on equity. I was thinking of renting it out for a couple of years then selling it to avoid paying taxes on the equity.

I don't want to become a landlord, don't have any interest. However, having someone else pay for the mortgage and later have an income is tempting.

If I don't do anything I would have to foot the $2k mortgage plus half the mortgage on the gf's house so even six months would add up. I could however do AirBnB since the house is fully furnished anyway?

 

[Mr. Tightwad]

1)Being a landlord helped me retire at 45. Wish I had more places. But it isn't for everyone.

2) I think the more important issue is moving in with your GF. You already have been divorced once. My GF makes 356K and I'm not doing it. Just don't get married whatever you do.

 

[brucethebroker]

All excellent advice. Great point about paying taxes on equity. I was thinking of renting it out for a couple of years then selling it to avoid paying taxes on the equity.

Not easy avoiding taxes once your personal home becomes a rental. But ask your tax adviser about not depreciating the home as a rental. We did that about 10 years ago when we used our former personal home as a 2 year rental (during the crash when prices dropped). If you depreciate, you pay re-capture taxes (ordinary income-ouch!) on that portion of your gain-pro-rated by % of personal vs rental use.

That is the way we avoided the "used as rental" taxes on our 2 of last 5 years personal use. BUT, that strategy may not be available today.

 

[calmloki]

Thought depreciation was assumed to have been taken whether it was or not on rental property for depreciation recapture purposes.

 

[JDARNELL]

Thought depreciation was assumed to have been taken whether it was or not on rental property for depreciation recapture purposes.

Correct

 

[pb4uski]

Thought depreciation was assumed to have been taken whether it was or not on rental property for depreciation recapture purposes.

Correct

+2... if it was a rental, then depreciation recapture applies whether depreciation was claimed or not.

 

[Bamaman]

Sell. That's not the price house you'd want to rent out. You have too much equity in it to rent.

 

[ivinsfan]

What's your long goal with the moving in, marriage, living together forever or something in between?. It's always about compromise, you are moving into her house which means she has less skin the game. If she wants to, she can kick you out and leave you without a place to live. Of course you can leave too but if you sell/rent your home you have a stressful situation. You also mention paying half of your GF's house payment. You guys need to have a serious talk about this IMO it's perfectly OK for you to pay half of the power, water, etc., but you should each make your own house payment until you figure out where this is going. If you pay half you are basically paying rent and building the GF's equity. If the two of you can't have a serious talk about this and figure it out, that's a red flag IMO.

How easy is it for your check on the house if it's empty. Park your drive in the driveway once in awhile, cut the grass...keep it clean. Maybe you have a close friend that would house sit for you, but be very careful to get everything in writing so they don't turn into a tenant with tenant's rights.

 

[RenoJay]

I like the idea of a hedge if the relationship doesn’t work but be wary. I just had a tenant move out and the walls are greasy, the flooring is ruined and lots of little things were broken.

 

[dvalley]

Thanks again all. I'll answer a few more questions (I wanted to stick to the financial points so I didn't go into too many details).

Thanks to the divorce laws and having been burnt once I have no plans to ever get married again until may be when we're in our 60s or 70s and still together. She knows it and understands it (she's also divorced). As for where it's headed well for now we're just working towards being together for a long time and moving in together seems to be the next step. We (mostly me but she seems fully onboard) want to buy a retirement property where I can have tools/toys/workshop and not be in the middle of a crowded town where just going to the grocery store is a struggle sometimes. However, that's about 8-10yrs away.

Her house is paid for but she doesn't live in it because she doesn't want to live in a big house alone. We could buy another property together but that's not only a bigger risk but also I'm not keen on sinking money into another in-between property which won't really meet my criteria for the dream house.

As for paying half, even if we rent a place together (we thought about that too) I'd have to pay half so in my mind it's only fair to pick up half of the going rate for a house like her's. Well I'll be paying more like 40% instead of 50% of the going rate. I think where the RE market is headed it's cooling off so might be a good time to sell and cash out. If I put 80% of the equity in the stock market for 5-7yrs I think I'll do better with my money. If things don't work out, well that would suck but I can always rent a place. I do have a lot of big machines and such in my garage so that would be a pain to figure out but I think I could rent a house or even buy one if the RE market is favorable. It's a risk but I'm leaning towards selling and hoping I can do better with my money than leaving it in my primary house. Her and I have been discussing all this and like with most things in life each option here has its risks but potential rewards. May be I'll just sit tight for a few months after we move in and then decide. My house is only about 25mins from her's. We won't be moving in until Jan/Feb if we do this.

 

[ivinsfan]

Given those details I'd probably lean towards selling too. You'd be pulling your money out of the housing market tax free, paying a fair rent payment and would like to relocate to a quieter spot in 8-10 years.

It sounds like you are ready to move on to another stage of life. May it be wonderful for both of you!

 

[dvalley]

Thanks. I always wanted a like minded partner in crime with great chemistry to grow old with and she fits the bill in all respects.

 

[Spock]

It depends a lot on your personality when it comes to renting it out.
Some people are not OK with cleaning up other peoples filth (not just messes/trash)
and even more so when it was your residence and will be again.
Rentals can be great IF you can deal with the occasional destroyed property and IF you hold them "forever" (1031b exchanges if you sell and buy another rental). But once you try to cash out, the depreciation recapture tax man bites. Hard.

 

[Bongleur]

since up to now it has been your personal residence then any gain would be tax-free...

WHOA! Taking the gain tax-free is only allowed once in your lifetime, and only up to $250,000.
...........

Since you are not making lifetime commitments to each other, you should not be paying your GF more than "fair rent." If you pay more, then when she sells the house, you won't get your fair share of the appreciation. So keep housing separate from actual shared expenses.

 

[Camellia]

WHOA! Taking the gain tax-free is only allowed once in your lifetime, and only up to $250,000.
...........

My understanding is that you can take the gain tax free every two years, not once in a lifetime.

I rented out a home I couldn’t sell when I moved, and discovered how much I didn’t like being a landlord. And the depreciation recapture was no fun either.

YMMV

 

[HI Bill]

Most of the cost of selling is commission, so let's say 5% of $600K, or $30K, plus closing costs. You'd be presumably taking the capital gains tax-free, so that offsets some of the costs. If you sold, then you broke up right away, obviously, this would have been a bad move. But if you've been with the GF for a long time and are fairly certain it will work out, I'd sell. Especially at your property's low appreciation rate.

I kept my condo for a year, with my fiancee and I splitting our time between her place and mine. That nearly cost me the relationship! Sometimes, you have to take a leap of faith....

 

[pb4uski]

....WHOA! Taking the gain tax-free is only allowed once in your lifetime, and only up to $250,000. ...

Bongleur, you are misinformed... the tax-free gain is NOT once in a lifetime... it is for any property that has been your principal residence for at least two of the last 5 years.

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.