Keep CA prop 13 property tax rate or sell for tax free gain?

[Jonah A.]

Hi folks,

Looking for some opinions.  We’ve got a property purchased in the SF Bay Area during the Great Recession for ~$275k. Property value has now increased to ~$625k.  We moved out around two years ago as our family outgrew the place and have been renting it out ever since.  Rental income is ok, we probably make around $500 a month after expenses, but for the amount of equity locked in the place we feel like we could be doing better.

We’re now debating whether we should sell or hold on to it as a rental.  On the one hand the property taxes are locked in at a favorably low rate due to California’s prop 13.  On the other hand, if we sell within the next year we could come close to maxing our our tax free capital gain ($500k for a couple - we’re not quite there yet but given how Bay Area prices jump around it’s not inconceivable).

For the sake of argument let's say we’re able to max out the $500k tax free capital gain upon selling.  Would it be better to sell, or hold onto it as a rental and reap the benefits of prop 13 in perpetuity?