Sell or hold this house? 5 year no-tax window + reduced ROE

[Shiva Pradeep]

Here are some details of the property (town home) I own

Timeline:

Bought: Oct 2013
Lived in it (Primary Home): March 2018 (4.5 years)
Rented it: March 2018 to Current 

Some numbers:
Original purchase price: $200,000
Original down payment (including closing cost): $45,000
Current market value: $410,000
Current loan balance: $110,000
Gain if sold now (8% closing cost, clear remaining loan balance, assume no upgrades): ~$265,000

Current rent per month: $2000
Monthly payments (EMI + HOA): $1800

Here are a couple of questions I have in mind that could use some help:

1. If I sell the house within the 5 year period (2 years of primary residency + 3 years of renting, i.e. before March 2021), I stand to not pay any taxes on capital gain. Irrespective of whether the market appreciates any further, wouldn't it make sense for me to sell the house in the 5 year period and cash out on the gains and not lose taxes? After this window, if I sell the house I would either have to pay taxes or do a 1035 exchange (which isn't easy IMO since the time window is small).
2. Since the time I've bought this house, the house value has appreciated well. The previous highest value of this house (ever) was $280,000. The ROI is high (I put in $40,000 down payment for the initial acquisition), however, the ROE (Return on Equity) is low assuming I have about $265,000 equity built and yearly gains returns of 4.52% ($12,000 gain after all expenses). The question here is how should I leverage the equity I have built here - I could sell (also due to question #1) and reinvest the money else where OR extract equity out of this (HELOC or refi) and invest elsewhere

I'm happy to clarify to help me get better answers.

[Jaysen Medhurst]

@Shiva Pradeep, you've done a really good job of analyzing the situation. I'm sure you already know what I'm going to say: sell this place and take the gains.

• You're losing money every month.
• The ~$265k could translate into a new investment property that will be much more profitable. ~$1MM property.
• Refi / HELOC doesn't make sense since the current property can support anymore debt and you won't be able to pull out all of your equity.