woodpack : There are several more considerations for keeping your property versus selling that have not yet been pointed out. IMHO the following are the most important considerations.
1. Did you previously line in the property as a primary resicence ? If so, and if you can sell at the point where you lived in it 2 of the past 5 years, you will owe no capital gains (except for depreciation recapture).
2. Consider all the costs of selling versus projected loss in value / gain in rental rates. The costs of selling should include :
a. Broker commisions. Assume 5-6% in this environment.
b. Capital gains taxes. Assume 15% of the gain, after selling costs
c. Depreciation recapture. This is 25% of the amount you claimed in depreciation over the time the property was rented.
c. Cost for repairs, termite, etc. Amount ???? AT least 1% of the price.Depends on the property.
d. Vacancy. Consider lost rent for at least 3-6 months required to sell the property. What matters is the difference in the vacancy between tenants (e.g. 1 month) versus vacancy while selling. At current CAP rates in SD this might be about 2% of the property value over 6 months.
e. Home values decreasing. Assume that you will have to sell at least 2-3% below April/May 2006 prices.
3. If you add these costs up, you’ll come up with the costs of selling. Compare this to anticipated decrease in home value and gradual increase in rent (at the inflation rate) over the next few years.
4. Most importantly : Consider your current cash flow and the relative value of the home with respect to your overall net worth. If the property is cash-flow positive, it will be easier to hold on to psychologically when home prices continue to decrease. If it is cash flow negative, it is more difficult to hold on to a depreciating asset.
