WWYD: 115k equity in primary residence

[Amanda Serrioz]

I've been a realtor in Wichita, KS for just over a year.  I consider myself green, but not "new," to investing.  We bought one rental for 30k cash in 2011 and sold it this year for 53k. Rented for 600-650/mo while we owned it.  It was a nice little deal!  In addition, we still own the first home we ever bought and rent it to family, but it wasn't purchased to be a rental.  We built our current home in 2013.  It was an open builder lot, and we subcontracted it ourselves.  Today we have 110-115k equity in it, after selling fees.  About 45,000 of that will have to go back into our primary residence to avoid cap gains taxes after we sell.

I've been reading different investing strategies, but WWYD in this situation?

I was leaning toward buying a 4plex with FHA financing, but then I realized how much was going to have to go back into the house to avoid cap gains taxes, so FHA owner-occ and 3.5% down seems pointless.

I also thought about buying a more expensive home needing updating or repairs and going all-in trying to flip it, but I'd like to be more diversified.

Maybe buy another similar priced, sized home to what we have, put the 45k down on that, and then buy rentals with the remaining approx 70k.

Or try to BRRRR but instead of using OPM use my own and then do the cash-out refi a year later. Can you owner occupy on a BRRRR for a year before renting?

What would you do?

[Lauren Speidel]

@Amanda Serrioz If you have lived in this property for at least 24 out of 60 months you may qualify for a pro-rated 121 Exclusion. This allows you to exclude 250k (single taxpayer) and 500k (for a couple). So if your gain is less than those amounts and you qualify for the exclusion you may not be in a bad position with capital gains. If you have lived in the property for a full 60 months (and it is your primary residence) you will qualify for the full 121 Exclusion.

If you do not qualify for the exclusion and if you plan on selling the property and reinvesting in another rental property, one option may be to do a 1031 Exchange and defer all capital gains tax and depreciation recapture liability. That way you can invest the full net sales price.

Please let me know if you would like to discuss.