Should I Keep Or Sell?

Question

I'm in an interesting situation. My grandmother recently passed away leaving her condo in Windsor, CT to my brother and myself. I used to own a two-family house in Windsor Locks, CT, but my kids and I moved in with my grandmother a few years ago because I lost my job and she needed help. I ended up walking away from the two-family because it was my first venture into real estate and I made a lot of mistakes, and learned a lot of very valuable lessons the hard way. I really want to get back into the rental market, but I also really want to move to be closer to the rest of my family (they all live in New Orleans, LA).

So, right now I have this condo which my attorney says I can stay in for at least a few months as long as I keep paying the home equity loan my grandmother owed (about $9k total), the condo fee, etc... My brother doesn't want the place. It's a little run down, but not excessively so mostly just needs some upgrades (carpet, paint...)

Basically, I have two options:

A) I can sell it with my brother. We would pay off all of my grandmother's debts and split what's left. I would take my half and go invest it somewhere else. With this option there's the issue of finding a place to live (I don't plan on moving out of state until the end of the school year - so around June).

B) I can buy my brother's half out. I'm not sure of the legality of how we pay off her debts this way, but I'm sure the lawyer knows how to take care of that. With this option, I could stay here as long as I like, the bank basically gets a 50% down payment, and I could move when I want and keep the condo and rent it out later, or sell it later. The biggest issue with this option is rehabbing the place and whether or not we should do that before or after I buy my brother out. (I'm not trying to screw him out of any money, but I'm not trying to get screwed either.)

I'm sure I'm leaving out a lot of information that would be helpful, but it's my first post so... fire away. I just want to get some opinions. What would you do if you were in my shoes?

Thanks.

Filipe Pereira · Answer

A 1031 allows you to essentially roll your gains into a "like-kind" property. It allows you to defer paying your taxes until you sell the next property...but, if you never sell, you'll never pay ;) Of course, there are some caveats, so I do recommend doing your homework on the subject! Like Vincent mentioned, you should also look into the details of receiving this as a "will-ed" item, as you might be on the hook for very little. Sometimes the costs of doing a 1031 isn't worth it.

I also like the idea of you living there and doing some repairs to increase value (paint goes a LONG way). Like you said, you can then either cash out refinance, or sell. Personally, I like to have as many income producing assets as possible, so I would probably rent it out.

I am from the area, and currently manage properties in Windsor, so if you ever want to "talk shop" or discuss some options, feel free to reach out. I'd be happy to help in any way that I can.

Happy investing!Filipe

Jorge Jimenez · Answer

@Filipe Pereira - Right now I'm leaning towards buying my brother's half out, fixing it up while I'm here, and then renting it out. I'll definitely keep you in mind.

Account Closed - A lot of things happened with my duplex. The two biggest cardinal sins I committed though were: paying too much for it, and being in a rush to find tenants and pretty much accepting the first people who came along. There were lots of other mistakes that I made along the way, but I'm older and wiser now as a result.

My brother and I are both carpenters by trade so we could definitely do most of the work ourselves, and we know guys who can help with things we don't do.

I haven't had it appraised, but I'd say in it's current condition the condo is worth about $100k. Comps in the area are going for around $150k. So a little bit of work could go a long way.

Jorge Jimenez · Answer

Account Closed - I like your last thought on that. I've been leaning towards staying here for the next six months, fixing the place up during that time, and then either renting it out (using the equity to possibly finance another deal somewhere else) or selling it for a profit. My only real issue with that is, depending on where I move to, I would be managing the property from possibly across the country.

I'll have to look into what a 1031 exchange is, that's the first time that I can recall hearing of it.

Account Closed · Answer

1031 exchange might not be necessary in this case since you got it as an inheritance and there should be a step-up in the basis so I don't think you'll be paying much tax if any. But I'm no lawyer though.

Account Closed · Answer

@Jorge Jimenez In that case I would second @Craig Curelop 's suggestions. I would add though for someone relatively new, it is better to get your feet wet doing the management yourself and that would require proximity to your rental. You'll learn more and know the ins and outs better. Why did you lose your two family house (duplex?)? How much is the condo worth on the market now? Do you have any skills fixing up places? And are you willing to be a landlord in New Orleans? These answers might allow others to chime in and give you better advice.

Account Closed · Answer

C) Live there til you move out. Pair up with an investor to get money to fix up the place a few months prior to moving out. Sell the condo, then split the proceeds 3 ways. Nobody is screwed and you have money to make the repairs (sounds like your bro and you don't). I'm sure if you offer a fair deal, there's plenty of investors in your area that will jump for it.

Jorge Jimenez · Answer

Thank you everyone for your thoughts and advice. As of right now, I believe I'm going to hold on to it. I plan on living in it until at least the end of the school year, I'll rehab it during that time, then get it rented out after I move to New Orleans.

Any thoughts on how long I should wait/if I should wait to refinance after I relocate if I intend on using the equity I have in the condo to finance another deal? Should I use the equity? I know this is sort of putting the cart before the horse, but I'm just curious.

Lauren Speidel · Answer

@Jorge Jimenez If you do decide to do a 1031 exchange then there are specific IRS requirements that you must follow. The residence can't be your primary residence but you can move out and rent the property for a period of time. The IRS states that you must own the relinquished property (in this case, the condo) with the intent to hold for rental, investment, or use in a trade or business. If you move out, take a few months to make some improvements and sell with the intention of doing a 1031 Exchange, under audit it may not be viewed favorably. In that situation you really can't show that you had the intent to rent the property or hold the property for appreciation. Your intent could be viewed that you had the intent to sell the property because you really didn't hold it for very long. Every 1031 advisor may have a different hold time requirement/suggestion. In my personal opinion, holding the property for 24 months as a rental or investment property would greatly reduce your intent risk.

Also, given that you inherited the property the cost basis was reset the day your grandmother passed. Therefore, you may not have a large tax and/or depreciation liability and if that is the case, it may not financially make sense for you to complete a 1031. I would recommend speaking with your CPA and also a reliable and experienced Qualified Intermediary (QI). A Qualified Intermediary is a company who can guide you along the 1031 exchange process. Enlisting the help of a QI is a requirement when completing a 1031 exchange transaction. I will PM you if you are interested in discussing further. Good luck!

Craig Curelop · Answer

@Jorge Jimenez - a 1031 exchange allows you to sell your property and use the proceeds to buy a larger property while deferring the taxes.

There is a lot that goes into it and you'll need to talk to an accountant or someone with experience doing it, but that's the gist.

Should I Keep Or Sell?

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