Trying to decide whether to sell rental property

[Dan Braunstein]

Hi all,

My wife and I bought a 2/1 condo in 2005 for $435K in San Mateo, CA. Due to our children's schooling situation we had to move into a San Francisco rental and rent out the condo which we have done since 2010. We refinanced the condo at 4% for 30 years which makes our mortgage $1,975 on now around $400K. After a few dark years, the market in San Mateo has recovered very well and now we are looking at a possible sale price on $675-700K. We currently rent it out for definitely below-market value at $2,400/mo. as this was a few years ago. We rent it out to Section 8 folks who have been great but we could definitely rent it for more (haven't had the heart to jack up the rent on them.) I've seen on Zillow as high as possibly $3,200/mo. However, when we did our taxes this year in addition to the $6K in property taxes, $6K in income taxes (rental income included) and around $10K in HOA (which we deducted), we are just wondering if it makes sense anymore. We actually had to borrow money to pay taxes from my sister-in-law and we are saving as much as we possibly can and are still coming up short with a combined income of ~150K excluded the rental income. We don't spend frivolously and am dedicated to savings but it still is not enough. Because we haven't lived in the condo for five years we are going to get hit with capital gains taxes and possibly a host of other taxes/fees. We're just wondering if the gross from the sale ($275-300K) minus whatever is taken out is worth it. One thought I had was to do an exchange on a property in somewhere more affordable like the Pacific Northwest to avoid the tax penalty, rent it out until we retire, and then move in but my wife seems very committed to the Bay Area and we simply can't afford to buy here even with a large down payment. Sorry for the very long-winded ask for advice but your insight would be greatly appreciated.

Thanks! Dan