Sell Now For a Nice Gain or Rent and Cash Flow?

[Todd S.]

I purchased a condo in 2012 for around $425,000.The property is now worth around $600,000, maybe a tad more.

The local rent is roughly $3,200+, while total housing costs are ~$2,400 per month, factoring in mortgage, taxes, insurance, and HOA. No advanced deprecation or anything is involved.

Question is; do I sell now or hang on to it and rent? I don’t see the property appreciating much more anytime soon. My general thought is that home prices are overheated and the building itself is getting older, built in the ‘60s. It's in a great area with high demand and that will never change. So over time the price will certainly increase, but I can’t see it selling for more than $650-$700k in the next 5-10 years, at best. 

If I sell now I can take the profit tax-free thanks to the exemption for owner-occupied properties held for two+ years in the past five.

Thought process is that ~$175,000 in profit would be taxed at 15% as long-term gain (I believe, correct me if I'm wrong) if I don’t get the home sale tax exemption and keep renting for more than three years, thereby nullifying the exemption.

I suppose I could rent for a year or two to test the waters and still sell after and qualify for the occupancy exemption, right, since I still would have owned for two of past five years in that case? Is this true even if I rent and buy another owner-occupied property during that time?

Is it worth the potentially limited upside? Renting leads to wear and tear, vacancy-related costs, I may need to put in upgrades as the current stuff gets older. Should I just book my gains and wait for another downturn? Or do I hold onto the unit in a very popular area and rent at a decent profit? Assume I don’t need the cash proceeds at the moment, can find another place to live, and don't want to live in the unit much longer.

Thank you for any and all input!

[Todd S.]

Originally posted by @Jerry Padilla:

@Todd S.

Have you thought of cashing out and using the profit to invest out of state, where the returns maybe greater? 

 That's certainly a thought but I think the price of RE is very high at the moment...and I don't know if I want to manage a property from a long distance.  Additionally, I like the idea of getting my profit tax-free...maybe I'm getting hung up on that but it'd be nice to take ~$150k or so tax-free wouldn't it...and I could use that, not cash-out, to invest in other properties in the future if/when prices do normalize.

Thanks.