Sell Rental Now To Leverage Cap Gains Exclusion

[Brad Rabinowitz]

Hi All. I'm a new member who has been battling the all to common question of hold vs sell. My situation is perhaps a little different, in that I'm in a position to sell my only rental property, which was my first home (tri-level townhouse), to avoid having to pay capital gains on it. 

I'll try to make this as concise as possible. I purchased the townhouse in downtown Fort Lauderdale as a bank owned property back in 2009 when I was 27 years old, for $232K. I put close to $80K into it over the course of 10 years or so, never considering it an investment property down the road; this was my home. Fast forward to 2018, married, my 2nd child arrived, so a larger SFH was in the cards. I was fortunate enough to be in a position where I didn't need the equity from the townhouse to put down on my new home, so I decided to turn it into a rental with the intention of a long-term hold, knowing I wouldn't really cash flow anything significant until the mortgage was paid off in 2030.

I have great tenants who pay on time every month, and with all of the property upgraded, I'm not currently bothered with maintenance issues. 

• Current Scenario:

1. 1. Purchase Price - $232,500
2. 2. Upgrades - $80,000
3. 3. Current Mortgage - $159,000
4. 4. Refied into a 15 year from 5.00% to 3.25% in 2015
   
5. 4. Current Value - $400,000
6. 5. Potential Profit UNTAXED after broker fees/closing - $215,000

The property cash flowed about $300/month for the past 18 months, but after losing my Homestead exemption and taxes doubling, it doesn't cash flow. Again, this was a long-term hold strategy, knowing I wouldn't cash flow for some time. I believe the market in Downtown Fort Lauderdale will continue to be be very lucrative for rents and will only continue to appreciate, but at what rate is anyone's guess.

So the dilemma is whether to save approximately $25,000 in capital gain tax alone by selling this year and finding a better investment vehicle for the profit without the time crunch of a 1031 exchange,  or count on the long-term appreciation

Thanks in advance for any advice. 

[Dave Foster]

@Brad Rabinowitz, You lived in that property until sometime in 2018.  That means that you have lived in the property for  out of the last 5 years.  IF you sell while that is still true then you would not pay any tax on the first $500K of profit (as a married couple).  You will only have to recapture two years of depreciation which will not be much.

That makes the question easy for me.