Rental Property: Time to Sell? June 2014

[paramount]

I’m fast approaching the 2 out 5 year rule to avoid capital gains tax on my rental property, and thinking of selling given the following factors:

1. 2014 1Q GDP/Economy Contracts -3%
2. Case-Shiller claiming a cyclical peak
3. I’m losing money on a month-to-month basis (not much, but still…a loss is a loss).

I still have the depreciation benefit.

Are you supposed to hold onto rental properties indefinately – even though there is not a clear financial advantage to do so?

I think the general thought is: If I sell now I’ll be kicking myself in 10 or 20 years for doing so…well, may be not.

I keep hearing: the economy is going to collapse, the dollar is going to collapse – buy toilet paper while you still can. If we get a low or negative 2Q GDP number, the collapse scenario may just play out.

Why not sell when you don’t have to worry about capital gains?

[The-Shoveler]

Why do you think the USA economy will collapse ?

I think just the opposite is about to happen

The largest demographic population group in the U.S.A just turned 22 and most likely just got out of college.

minimum wage set to go up dramatically.

In 1980 the largest part of the population was in their early/mid 20’s and it was incredibly hard to find or keep a Job and everyone thought Japan was going to take over the world and the USA was done!!
Sound familiar ?

By the mid 80’s wage growth was going through the roof as was GDP.

[recordsclerk]

It all depends on how much capital gain you are getting from the sale. Someone closer to the 250K for single and 500K for a couple limits should probably sell. Someone that has about 50K worth of gain after paying commission/closing should probably hold if good tennant in place. I have about 125K of capital gain and down to 6 months left before my home owners exemption expires. I will probably hold for now. It does good as a rental and I’m not seeing a better return on the money elsewhere.

[Coronita]

never mind. I thought we were talking about a rental not a primary converted to a rental.

[UCGal]

Some questions:

– are you ok with being a landlord? There are folks who enjoy it. And folks who look at it as too much work. Given some of your statements in the past I know you’ve had tenant issues and management company issues. Are you ok with future hassles/issues?

– You say you’re not cashflowing. That’s a red flag for me. Presumably, at some point, rent will go up to where you have a net positive cash flow. Are you ok waiting it out?

– You mention depreciation. You know that the depreciation is recaptured when you sell. So that will impact your taxes when you sell.

[Coronita]

You know maybe I’m crazy. But i actually like being a landlord.. If I had 11 or so rental properties locally, I wouldn’t mind doing it versus going to work everyday….

Unfortunately, I’m still ways off from it.

[spdrun]

To the OP – when did you buy? If you bought in 2006-7, I’d be wary and consider selling. If you got a rental in a good area at 2009 or late 2011 prices, I doubt that prices will drop below those two nadirs.

As far as future prices, we have different factors that mostly cancel.

For appreciation:
(1) Mel Watt, who wants to expand access to credit via the GSEs.
(2) Possibility of future growth, higher wages, etc.
(3) We still haven’t exceeded the 2006 bubble peak
(4) 5-6% isn’t a horrible return in this economy

For depreciation:
(1) Julian Castro, who wants to wind down the GSEs.
(2) Upcoming end of QE3 (finally!) and higher rates coming. If the economy improved, better investments than property might also exist.
(3) 2006 was a bubble, might take a long time to exceed it. Prices in SD overcorrected to the downside in 2009 and 2011. Now they may have overcorrected to the upside.
(4) Investors are burnt out and can see areas with better returns

[sdsurfer]

I’ve grown to believe the Getty quote about buying when others are selling and selling when they are buying and tend to apply that to many areas of life.

If everyone around me is telling me about collapse or buying toilet paper while I can then I think prosperity is right around the corner. Inventory has gotten a little better recently, but it is still low. That tells me that some people are holding onto their properties and I want to be like those people.

If you take depreciation and everything into consideration with regards to your financial situation are you still negative each month? I’d want to talk with my tax person prior to making the decision because I never want to be negative, but if I’m having a good year then the write-off might justify keeping it. I always want to figure out what stays in my pocket/account. If I sell a property to avoid the monthly loss, but then I get to give that same money I’m saving to the IRS then I’d rather keep the property.

[an]

[quote=flu]You know maybe I’m crazy. But i actually like being a landlord.. If I had 11 or so rental properties locally, I wouldn’t mind doing it versus going to work everyday….

Unfortunately, I’m still ways off from it.[/quote]
I’m totally with you. I also love it too. If I have 10 places around SD, I too would call it quit on my W2 as well.

[joec]

I’d suggest it just depends on your situation…I don’t think anyone will know what will be best for you since:

Being a landlord isn’t for everyone.
What are you going to do with the sale proceeds?
You aren’t cash flowing currently where someone else who always cashflows may have a diff opinion.
What other properties/rentals do you have?
What’s your tax situation like?
How much other investments do you have?

As you can see, there are tons of questions to ask and since no one can see the future, it’s not possible to know what’s best.

I just sold out of a fair bulk of my stocks, but the decision is because I needed the cash proceeds so selling at an all time high is a plus…It can go higher, but basing your decisions on the “why you need to do it” (I need money)

is a better bet than the “maybe” or “might happen” (like property/stock can keep going up, they might change tax laws, etc…).

[paramount]

[quote=UCGal]
– You say you’re not cashflowing.
[/quote]

I’m not…thanks to Jerry’s Kids.

[HLS]

The depreciation ‘benefit’ adjusts your cost basis.
It can cost you eventually OR
You can defer with a 1031 exchange.

It depends on how much tax free gain you have right now but consider this…

All things being equal, if the house next door was exactly the same and for sale at the same price,
you might be better off selling yours with a tax free gain and buying the one next door with the proceeds and establish a higher cost basis and higher depreciation.

Just because you sell doesn’t mean that you cannot buy something else. You may even get a better deal on a different property.
If you have been out of the house for almost 3 years, if the closing drags out for any reason you could lose the opportunity.
A tax free gain is potentially a huge benefit.
**Discuss your plan & strategy with your tax advisor.

[CA renter]

[quote=paramount][quote=UCGal]
– You say you’re not cashflowing.
[/quote]

I’m not…thanks to Jerry’s Kids.[/quote]

You sure it’s not because you’ve paid too much, or that it’s older and needs more maintenance, or that you’re not getting the right tenants who will care for it better, or that your insurance is too high, or your interest rate is too high, or that you haven’t made the right improvements and marketed it properly to get the best possible rent/tenants? No, it’s because of “Jerry’s kids.” Riiight…

So, let’s hear the specific details about how you would be making money if not for “Jerry’s kids.” Details, please! This should be fun!

Here’s something to get your started. It shows the states with the lowest and highest property tax rates…and your beloved Texas is one of the highest, while California is not.

http://taxes.about.com/od/statetaxes/a/property-taxes-best-and-worst-states.htm

————–

As for my 2 cents regarding whether or not you should sell, I think you should sell. Get the tax-free gains and relatively high price while you can. Inventory and interest rates are low-ish, so you might as well take advantage of the market conditions.

[carlsbadworker]

You’re asking the wrong question. You should ask if anyone wants to buy from you at this price. If no one does, it is time to sell.

P.S. I am biased for this answer because you’re paramount and I have seen your posts over the year and don’t feel that you’re built for being a landlord.

[joec]

[quote=HLS]The depreciation ‘benefit’ adjusts your cost basis.
It can cost you eventually OR
You can defer with a 1031 exchange.

It depends on how much tax free gain you have right now but consider this…

All things being equal, if the house next door was exactly the same and for sale at the same price,
you might be better off selling yours with a tax free gain and buying the one next door with the proceeds and establish a higher cost basis and higher depreciation.

Just because you sell doesn’t mean that you cannot buy something else. You may even get a better deal on a different property.
If you have been out of the house for almost 3 years, if the closing drags out for any reason you could lose the opportunity.
A tax free gain is potentially a huge benefit.
**Discuss your plan & strategy with your tax advisor.[/quote]

The sell and rebuy again is a great point I didn’t think about…Sorta like if you can sell a stock and rebuy the same thing, but not pay taxes on the 1st sale, sounds like a no brainer…at least when it comes to stocks.

Course, a house is a lot more work with fees, hassles, differences in properties which makes it so much more work…

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