Should I sell or rent my old primary residence?

Question

Dave Foster · Answer

@Tj M., No need to rush to a decision.  Right now because you have lived in the property for 2 out of the last 5 years you can sell and take the first $250K ($500K if married) of profit tax free.  That's no small deal!

But you can also decide to be patient and rent that house for up to three years and sell then.  As long as you pay close attention to the dates you will still get to take the first 250/500K of profit tax free because you still qualify as having lived in the property for 2 out of the 5 years prior to sale.

That plan gives you the most flexibility.  Balancing the other side might be cost to prepare to rent or later to sell and your debt position if you own both houses.

Natalie Kolodij · Answer

I was coming here to say exactly what @Dave Foster said. Smart guy that Dave.

If you just moved out you can rent the house for 3 years now and still qualify for the primary residence gain exclusion. If at the end of 3 years you decide you want to keep it as a rental, great If not- you can still sell it and avoid the bulk of the gain.

On the flip side you can sell it now with no gain.

Thomas S. · Answer

You will have only $1275 to cover all the expenses on the property going forward. Common for expenses to be in the range of 50% going forward long term on a SFH so aside from appreciation probably not much profit holding as a rental.

You may also want to consider the amount of ware and tear/damage tenants do and consider reno costs when it is time to sell. Purpose built rentals do not have this issue but when selling a SFH appearance and upkeep are far more important to buyers. You may wish to sell within the 5 year limit to realise the capitol gains savings.

Alina Trigub · Answer

@Tj M. A lot depends on your long term plans and investment line you're in.  Are you an SFH or MFH investor? Will you incur capital gain tax if you sell your old house now? If so, maybe keeping it for a while while renting out and then doing 1031 into a larger property down the road will make sense? Is it easy to rent it out? Will you have the time to be a landlord even though it's one property but it'll still require some time on your end. On the other hand, if you were to sell your old house, are you ready to put money to good use (and I don't mean to pay off the loan on your new primary residence)? Rather buy a new investment? These some of the questions you need to answer for yourself to make an intelligent decision.  For tax advise, you may want to consult with a CPA.

Best!

Joseph M. · Answer

I probably should of been more specific. You would sell it if you could put the capital to work better (give you a higher return) in another asset. Keeping the house as a rental may be an opportunity cost.

$2750 is a nice rent, but if the market value of the property is $400k , not so much. I wouldn't consider so much what you  paid for it years ago or what your mortgage payment is , but rather what your return /cap rate would be if you had to buy that property today. Would it even cash flow?

If your cap rate would be 2% for example, that could be an opportunity cost if you could invest somewhere else and make say 6% cap.  Of course there is appreciation to take into consideration , do you feel the area the home is located will appreciate more than any other area?

An example in my area there are homes for $600,000+ but they might be renting for only $3,000 month.  The landlord can only afford to rent them at this price because the house is paid off or their mortgage is tiny since they bought years ago. This is not a good return without appreciation. Of course Southern California has had high appreciation historically over the long term and especially the past several years  ...but there have also been big dips too.

I don't know Reno market really, but I have heard about new companies moving there and prices increasing, so it seems to be a good place for appreciation too.

Apparently luxury housing went up over 53% there in a year according to this article, housing shortage they say.

https://www.realtor.com/news/real-estate-news/reno-nevada-luxury-prices-soar-amid-general-housing-shortage/

Martin L. · Answer

I rented out my first house when I moved.  It's basically how I ended up in this line of investment.  You're talking about nearly $1300 cash flow, which is frankly awesome.  Having a rental property will also give you a tax deduction, so you'll get more taxes back.  Having a paid off house will not give you anything except a bigger target if someone wants to sue you.  I remember a long time ago in my business law class in college, we discussed the benefits of having a mortgaged home (tax deductions) and the liability of having your primary paid off (basically each state has an exemption value for your primary home.  If your home is worth less than the exemption value, you can't lose it in a lawsuit.  If it's worth more than the exemption, it can be included in a lawsuit against your net worth).  This was all a very long time ago, so laws may have changed or I may have remembered incorrectly, but my key takeaway from that class was to always make sure my house was worth less than the exemption value.

Of course, playing the flip side... if you lived in your old house for at least 2 of the last 5 years, you can avoid some capital gains tax, use the money to invest in some other cheaper properties, and possibly generate more cash flow than just the single property.  That's more work, more risk, but more potential as well.

Should I sell or rent my old primary residence?

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