Tempted to sell out of landlording in San Marcos

[HLS]

There are tax aspects to consider and there’s some expert advice available here but that’s not my expertise.

30+ years ago I had a wealthy client who explained to me that he was a member of a group of wealthy guys, who really were wealthy. They had high net worth and lived well, but many had no ‘cash’
It was tied up in investments & tax shelters(in the 80’s)

It didn’t make sense at the time but over the years I’ve fine tuned strategies for myself and clients that have worked well.

There’s a time in life to take risks and there’s a time in life that you want to be more conservative.
Sometimes a person in one stage is trying to give the other stage advice and it’s inappropriate.

I’ve learned that having cash is not important as long as you have ACCESS to cash if you need it.

IMO there’s nothing wrong with manageable debt and dependable income streams to support.
I’d rather have cash flow and income throughout life to enjoy, rather than knowing I could have huge income
10 or 20 years from now.

To just stubbornly say that ‘I want no debt at retirement’ and not explore alternatives, is foolish.

If I could borrow money at 3.5% and earn 5%+ on it,
I’d be happy to be in ‘debt’ for the rest of my life.

If I had a 401K AND a mortgage AND a secure job,
I would max out a 401K loan and pay down/off my mortgage.

I think the entire 401K system is a ticking time bomb and a huge threat to the world economy, far bigger than the
housing bubble of yesteryear.

[Coronita]

[quote=ltsdd][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.[/quote]

Funny you should mention this because I as just talking about this with others and was deciding whether to discuss it here, since most of the posts now on Piggington aren’t finance or re related, so I thought it would be a moot point to discuss and brainstorm… But now that you brought it up. Based on my initial research, converting a rental back to a primary and then subsequently selling the primary will result in the following tax consequences.

1) you end up paying of depreciation recapture on your first rental and any portion of your new home that was briefly a rental

2) your taxable capital gains ends up being prorated based on number of years both properties were rental / number of years your exchanged home is a primary, subject to a 5 year requirement which I won’t discuss here. The longer you use the property as a primary, the less the taxable amount on the cap gains.

So for example if you had a rental for 4 years and 1031 exchanged to a home was rental for 2 years and then converted it to a primary home and used it as a primary for 10years. When you sell it, if you had a $250k capital gains from it, 6/16th of that would be taxable at your capital gains tax rate. 10/16th of it would be tax free…I think… again i just started researching this now.

And, there would be no tax consequences if you don’t sell you new primary.

I think there are also a lot of benefits regarding step-up cost basis when you die and your kids inherit the property, but I haven’t finished that research yet ( I believe both capital gains a depreciation recapture both get wiped out as part of your kids inheriting your estate, but not 100% certain, as I haven’t gone researching there yet)

[HLS]

I think spouses get stepped up basis also..
Have heard several stories from the Bay area..
Spouses don’t usually die together before kids get it.

Houses bought 50 years ago for $50,000, worth $2M today,
Husbands were sick. Told wives to sell the house after he died… limited (or no?) income tax owed because of stepped up basis ???

[no_such_reality]

Good point about the interest deduction flu on the rental.

For some there’s great comfort in paying off therimary. I also agree with HLS reasonable debt at reasonable rates is prudent as long as you don’t gamble.

You can lock up your money in equity or use it as the down payment for a small apartment building in a nearby state with a 7-10% cap rate.

[svelte]

[quote=ltsdd][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.[/quote]

This points out the folly in making multi-decade financial decisions based on current tax law.

Tax laws change.

[Coronita]

[quote=no_such_reality]Good point about the interest deduction flu on the rental.

For some there’s great comfort in paying off therimary. I also agree with HLS reasonable debt at reasonable rates is prudent as long as you don’t gamble.

You can lock up your money in equity or use it as the down payment for a small apartment building in a nearby state with a 7-10% cap rate.[/quote]

I totally agree. If you are able to pay off your primary and have sufficient reserves left over to pay for other things in retirement, you really can’t go wrong with the approach you take, and its a matter of personal preference imho. The key I think is as you head into retirement to try to pin your living costs and make them as fixed and consistent as possible. Fixed mortgages can do that if your income streams are more or less fixed. Or if you don’t want to deal with the pita factor of tenants, perhaps sell or 1031 exchange into a primary. I am trying to figure this out so who knows what strategy is optimal. I think I am just trying not to majorly screw this up.

The other thing about being old and retiring is if you sell and buy another property of equal or greater value, you can keep your old property tax rate. So if you had your primary since 1980 like my parents did, then your total property tax on a very nice single family home is probably less than 2 months of rent people pay on a 2 bedroom condo. And I believe if your kids end up inheriting those properties, that property tax rate continues. Prop 13 is just great. That probably is also one of the reasons housing inventory is staying low. Net of doing a house exchange is doing nothing to the inventory.

[Coronita]

One bad thing about paying of a primary…. I am finding I am having less financial discipline these days.

I use to do a much better job budgeting things. Now, there’s less motivation to cut things so close. Or spend the time to figure out the most optimal way to save on X. I don’t know if that is a good or bad thing. I just call it how it is.

[HLS]

[quote=flu]One bad thing about paying of a primary…. I am finding I am having less financial discipline these days.

I use to do a much better job budgeting things. Now, there’s less motivation to cut things so close. Or spend the time to figure out the most optimal way to save on X. I don’t know if that is a good or bad thing. I just call it how it is.[/quote]

Are you enjoying your life more OR less now ??
(more relaxed/less stress?)

The transaction of paying off your primary did not make you less disciplined;
Your feelings about your situation have made you less disciplined.

**Your feelings about this could change at any time; and that’s OK.

[Coronita]

[quote=HLS][quote=flu]One bad thing about paying of a primary…. I am finding I am having less financial discipline these days.

I use to do a much better job budgeting things. Now, there’s less motivation to cut things so close. Or spend the time to figure out the most optimal way to save on X. I don’t know if that is a good or bad thing. I just call it how it is.[/quote]

Are you enjoying your life more OR less now ??
(more relaxed/less stress?)

The transaction of paying off your primary did not make you less disciplined;
Your feelings about your situation have made you less disciplined.

**Your feelings about this could change at any time; and that’s OK.[/quote]

I guess I feel I can enjoy life more because I don’t need to be as careful of where my money goes. (I’m not burning through it, just less anal about it).

I don’t know if that’s good or bad.

[scaredyclassic]

GUILDENSTERN
Prison, my lord?
HAMLET
Denmark’s a prison.
ROSENCRANTZ
Then is the world one.
HAMLET
A goodly one, in which there are many confines, wards, and dungeons, Denmark being one o’ th’ worst.
ROSENCRANTZ
We think not so, my lord.

HAMLET
Why, then, ’tis none to you, for there is nothing either good or bad, but thinking makes it so. To me it is a prison.

ROSENCRANTZ
Why then, your ambition makes it one. ‘Tis too narrow for your mind.
HAMLET
O God, I could be bounded in a nutshell and count myself a king of infinite space, were it not that I have bad dreams.
GUILDENSTERN
Which dreams indeed are ambition, for the very substance of the ambitious is merely the shadow of a dream.
HAMLET
245A dream itself is but a shadow.
ROSENCRANTZ
Truly, and I hold ambition of so airy and light a quality that it is but a shadow’s shadow.
HAMLET
Then are our beggars bodies, and our monarchs and outstretched heroes the

[HLS]

FLU
If you can recognize and admit to enjoying life more,
isn’t that a good thing ??

I can share plenty of discussions I’ve had with
senior homeowners about reverse mortgages
(I don’t like them; only a last resort)
Most were similar..
a) They were in a rush to have no ‘debt’ so they paid off their house. They have no debt, but very little cash to live off & enjoy life. Only option today is a reverse mtg.
They can no longer qualify to refi for a conventional cash out loan.

b) Others had lots of equity but no cash. They didn’t sleep well because they had no money and worried about paying bills and enjoying life.

Ive never met anyone who had money in the bank/cash cushion that didn’t sleep well even though they had a mortgage.

Many seniors are just getting by. It’s hard to imagine when you only know ‘wealthy’ people. Not everyone collects SS or gets much.
The heirs of people with no mortgage will be the winners, and many of them deprived themselves of enjoying life.

Of course there is a price to pay to have some debt, but you cannot understand the feelings that some people have about their situation.
There’s a price to pay to have no debt as well; not always financial.

[Coronita]

[quote=HLS]FLU
If you can recognize and admit to enjoying life more,
isn’t that a good thing ??

I can share plenty of discussions I’ve had with
senior homeowners about reverse mortgages
(I don’t like them; only a last resort)
Most were similar..
a) They were in a rush to have no ‘debt’ so they paid off their house. They have no debt, but very little cash to live off & enjoy life. Only option today is a reverse mtg.
They can no longer qualify to refi for a conventional cash out loan.

b) Others had lots of equity but no cash. They didn’t sleep well because they had no money and worried about paying bills and enjoying life.

Ive never met anyone who had money in the bank/cash cushion that didn’t sleep well even though they had a mortgage.

Many seniors are just getting by. It’s hard to imagine when you only know ‘wealthy’ people. Not everyone collects SS or gets much.
The heirs of people with no mortgage will be the winners, and many of them deprived themselves of enjoying life.

Of course there is a price to pay to have some debt, but you cannot understand the feelings that some people have about their situation.
There’s a price to pay to have no debt as well; not always financial.[/quote]

I agree that being house rich and cash poor isn’t necessarily a good thing heading into a retirement. As long as “income in” is more than “expenses out”, and “income in” and “expenses out” are relatively stable, that’s what matters to me. I’m just trying to set my required “income in” at a minimum wage job, just in case. But even then, it might not that be that bad. Afterall, I hear that minimum wage will now be $15/hour.. Awesome. 🙂

[Coronita]

The only thing though is college expense. Hopefully, our budgets for that is sufficient. Part of that will come out of a well funded 529 account that clobbered most of my other account’s performance, a custodial account that’s been religiously gifted to annually, and if necessary selling of a rental property if necessarily at that point. I figure that should take the little kiddie through med-school (if that’s going to happen) heh heh.

Of course, we can always try to get into a UC school, pay in-state tuition, and piss off people that think paying in state tuition costs CA taxpayers a lot because of the reduced tuition, especially if the student is chinese,lol.

[flyer]

Having what you want and little debt is a great feeling, and our family has always pretty much taken that path, but never at the “cost” of being cash poor, so I completely agree with this discussion.

Although I know there’s an ongoing discussion about Prop 13 being repealed in some form, it has definitely been very helpful to many of us over the
years–especially the older members of the family–but it will be interesting to see how things go in the future.

[bearishgurl]

[quote=flu][quote=no_such_reality]Good point about the interest deduction flu on the rental.

For some there’s great comfort in paying off therimary. I also agree with HLS reasonable debt at reasonable rates is prudent as long as you don’t gamble.

You can lock up your money in equity or use it as the down payment for a small apartment building in a nearby state with a 7-10% cap rate.[/quote]

I totally agree. If you are able to pay off your primary and have sufficient reserves left over to pay for other things in retirement, you really can’t go wrong with the approach you take, and its a matter of personal preference imho. The key I think is as you head into retirement to try to pin your living costs and make them as fixed and consistent as possible. Fixed mortgages can do that if your income streams are more or less fixed. Or if you don’t want to deal with the pita factor of tenants, perhaps sell or 1031 exchange into a primary. I am trying to figure this out so who knows what strategy is optimal. I think I am just trying not to majorly screw this up.

The other thing about being old and retiring is if you sell and buy another property of equal or greater value, you can keep your old property tax rate. So if you had your primary since 1980 like my parents did, then your total property tax on a very nice single family home is probably less than 2 months of rent people pay on a 2 bedroom condo. And I believe if your kids end up inheriting those properties, that property tax rate continues. Prop 13 is just great. That probably is also one of the reasons housing inventory is staying low. Net of doing a house exchange is doing nothing to the inventory.[/quote]Replied to here:

http://piggington.com/recommendation_15_yrs_fixed_mortgage_lender

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