Tax reform outcome - should it affect sell decision Sacramento

[Kenny Tan]

I have been thinking of selling a rental duplex in Sacramento. Owned since 1999. Market is strong for seller, almost 0 inventory in area for a few weeks. One tenant is moving out in June, the other is staying. My rent is below market, so I can bring it up to $1400 each side. That would provide 1200 cash after all expenses, including maintenance. I have 150K mortgage. Sell price 525K. May have 250K cap gain and dreaded depreciation recapture.

I do not want to do 1031 exchange. I want to divest away from day2day rental involvement. Don't like DST, TIC... too much management fees, tie up $ too long. My plan was to take the cap gain tax hit and move harvest the equity to more liquid equity investments such as diversified index and low fee market funds.

One of the counterpoint to selling is rent in Sacramento can continue to go up while my mortgage is fixed. However, the sell price is looking attractive. I don't know if we are in bubble territory but it is ripe. The San Francisco Bay Area is cooling. 

With Trump's tax reform on the table, how do you think it may affect my sell decision  wrt Cap Gain tax changes?  

It may or may not pass and it may or may not happen in 2017. Any suggestions?

[Wes Blackwell]

@Kenny Tan

I work extensively in the Sacramento 2-4 unit market, and based on your suggestions I'm assuming the property is somewhere near the city core or in Fair Oaks / Carmichael. You should have no problem selling that property ASAP, probably to some all-cash investor from the Bay Area.

BUT - the question you have to ask yourself is "What is the end goal or desired outcome about this investment?" Not just the rental income, but what would you do with the equity otherwise.

Is it to put it in some other investment that will get you a better return? Then perhaps you should sell.

Is it to secure your retirement? Then perhaps you should keep it, because if you haven't refinanced back to a 30 year loan since 1999 that puppy is almost paid off. In 12 years it will be free and clear and provide you $3,000 to $4,000 per month in income. That is YUUUUUGE!

Plus, if you're near the city core you will also be at the core of the rental demand, and can expect to see rent increases of 10.2% this year and 8.5% next year as projected. Even if we don't hit those numbers, it's surely going up. Watch this quick video on ABC10 News for an overview of the trends going on in Sacramento from all the Bay Area migration:

http://www.abc10.com/news/local/sacramento/what-you-need-to-know-if-you-want-to-buy-or-rent-in-sacramento/434803817

Here's the summary:

- People are moving to Sacramento from the Bay Area

- We don't have enough housing inventory to meet the demand

- So rents and home prices continue to increase

Skip to the 0:40 mark to watch the property manager state that he has tenants willing to sign leases before even seeing the property hahahaha.

"When it comes to Sacramento, I feel we haven't necessarily hit a peak. I think there's still a lot of people from the Bay Area moving this direction because the reality is Sacramento is still much more affordable than the Bay Area."