Tempted to sell out of landlording in San Marcos

[ldub818]

So I bought a condo/townhouse in the Magnolia at Old Creek Ranch complex (Melrose and Rancho Santa Fe Road) back in 2013 for $345k, put enough down that the renters are covering my costs plus a little extra. So far it’s been a nice supplemental investment play (we max our retirement accounts so we were looking for another avenue). But lately the prices have been moving up at a bit of a clip, latest comps are $450-$460k. While that’s not enough to make the transaction costs and capital gains taxes worth it for me, it’s now not far off from us being able to sell and pay off our primary home and just call it good. I won’t bore you with our life story and I know about real estate exchange to avoid taxes, we are just thinking of simplifying to prepare the glide path for retirement (early 40’s looking to retire early 50’s). Do you all think we are safe to hold the rental for another year?

[no_such_reality]

So if prices go up to around $500k, you’re thinking your best investment is to sell, take the 7-8% hit on selling fees, take the 29.3% tax hit on the cap gain and then paying of the remaining home loan that is finance at probably 4% or less?

[The-Shoveler]

It depends.

If you just want to be done with LL’ing (or a particular property/investment etc…) then now may not be a bad time to get out.

No one knows what will happen next year, but in ten years….

Who knows maybe you would want the income.

[ldub818]

So this is what I’m trying to understand, why is it 29.3% vs. long term capital gains tax? I’ve just started exploring this, but I read 15% or 25% depending on depreciation claw back.

[La Jolla Renter]

Do you have kids that could live there someday? A good reason to keep it.

If you can afford to retire that well off in your early 50’s. Then 50k net profit here or there shouldn’t be much of an issue.

Why not hold it for 10 years.

[no_such_reality]

The long term rate would either be 15% or 20% depending if the $100K pushes you over the $400K taxable income

California will tax it as income which you are most likely 9.3%.

So effective something like 24.3 or 29.3. Not including any other tax hits /credit reductions the increase AGI may cause.

[ldub818]

Thanks for the explanations everyone. I appreciate the thoughtful responses. I’m going to meet with my tax person to discuss. We make $300-310k combined so looks like there are lots of pitfalls to watch out for. A little bummed right now – I know, 1st world problems.

[plm]

I want to sell my rental too but not because I think the property value will go down, its just a pain to take care of renting it out.

But as you will probably find out from your tax person, you are going to see a big tax hit. I calculated mine to be 23.8 just for federal. 20 for long term cap gains + 3.8 for medicare. Hopefully I’m wrong since I’m not a tax professional. But it really didn’t make much financial sense to sell in my case. Yeah, 1st world problems.

[HLS]

Obviously I don’t have your numbers, but I would consider refinancing your primary to a new 30yr up to $417K, taking cash out and paying off the rental.
(Rather than selling the rental, paying taxes on profit
and paying off primary)

I don’t get the concept that retirement means having no mortgage payment. Creating income works well for many.

Equity doesn’t earn anybody much.
Not a concept for everyone, but I’ve seen this work miracles for some who didn’t think they had cash flow options.

[no_such_reality]

Actually HLS, why not the other way. Refi the rental, strip the equity,may off the primary and put all the risk into the rental were if something happens on the income front the only thing with the lien is the rental?

A lot of people like the free and clear primary so they don’t worry about an aggressive foreclosure or the perceived cash drain in retirement.

[HLS]

Refinancing a primary is less expensive than a rental.
Either way you end up with the same amount of debt.
It’s the cheapest mortgage money you can get.

Historically, a very small % of people with moderate net worth++ end up in trouble/foreclosure.

Seek a tax professional for tax aspects.
Many people forget about the standard deduction when figuring Itemizing Deductions… The larger your household, the less sense it makes to itemize.

Being a landlord isn’t for everyone, but if you believe that property values will increase, I would think that owning 2 properties with some debt is better than owning one free and clear.

Having hundreds of thousands of dollars (or millions) of equity but not being able to enjoy your life is pointless to me.
Your heirs will appreciate it !

It’s a different perspective than some who want to pay everything off and have no debt later in life..
I’ve known people who died young with lots of equity and others whose health declined that their golden years weren’t so golden,,, But they had no debt, little cash and lots of equity.

[ltsddd]

.

[La Jolla Renter]

HLS and no_such_reality, great points.

Lots of strategies with a rental down the road.

1031 exchange it into your ultimate retirement home.

20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.

The rental strategies are numerous, but the landlord game is not for everyone. It really only works well if your a shrewd businessman, a good handyman, or lucky. Lucky being great tenants or big appreciation.

[Coronita]

[quote=no_such_reality]Actually HLS, why not the other way. Refi the rental, strip the equity,may off the primary and put all the risk into the rental were if something happens on the income front the only thing with the lien is the rental?

A lot of people like the free and clear primary so they don’t worry about an aggressive foreclosure or the perceived cash drain in retirement.[/quote]

Fyi…slightly related …You can’t cash out-refi a rental and then deduct the mortgage interest on the amount you cashed out against your rental… unless you use the equity you took out to improve the property or to buy another investment. In the last scenario, you would deduct the mortgage interest as an investment expense on the new investment. Of course , some people cheat on their taxes probably. But I wouldn’t recommend it since if you get caught your would be in deep shit.

So you would lose your mortgage interest deduction on both your primary (no with no loan) and your rental I think.

Also, a rental you are probably paying 1/4 percentage higher on the loan, and some rentals cannot be easily refinanced or even qualify to get a loan especially if it’s an attached community with less then 50% own occupancy.

[ltsddd]

[quote=La Jolla Renter]
20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.
[/quote]

This loophole has been closed with the Housing Assistance Tax Act of 2008. Essentially, value appreciation while the property is a rental is subjected to capital gains tax.

[Author]

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