Should I sell my Single Family home or Rent it?

Question

I have been building a new construction single family, and will be done in March. The plan was to rent it out for 1650$ once completed. All in costs are around 160-170K. Appraisal is 208k. However, I’m now getting interests in buyers asking if I’d like to sell, etc. It’s not even on the market yet, or complete and the interest is strong. My question is this, would you sell or would you rent it? Part of my strategy is reducing my taxable income by getting the great write offs that real estate produces, but the allure of quick cash is tempting. If I do decide to sell, are there any ways to prevent/delay the gains from being taxed, if rolled into another property, or something. Help me out folks!

Clayton Mobley · Answer

@Jess White How long have you had this property? I understand it's still under constructions but just wondering. There is no hard and fast rule for how long you need to hold the property for it to be eligible for a 1031 exchange, though most pros agree 12-18 months feels safe. The primary issue is your intent to hold it as a long-term investment. A 1031 can't be used for flips, for example, as those are considered business inventory for tax purposes.In your case, it sounds like your intent is easily proven. Aside from your post here, I'm guessing you have communication documented elsewhere where you talk about holding it as a rental. If your intent to hold it for a long period as a rental is obviously and clearly documented, you could get away with a 1031. Again, there's no specific rule, it's all about intent. This is specifically because of situations like yours where an 'unsolicited offer' arises on a property intended to be a long-term investment, or when folks need to leave the market they're in, have financial emergencies, what have you. The IRS allows for certain unforeseen circumstances like this that result in a long-term investment being sold on more of a 'flip timeline'. That being said, if you keep having 'unforeseen circumstances' on property after property in order to execute 1031s on short-term investment props, the IRS will get wise pretty quick. But a one-off like this with obvious documentation should be ok. You'd need to speak with a Qualified Intermediary to execute a 1031, and they will make sure everything is as it should be.If you were to execute a1031, you would defer taxes on the gain and roll everything (total value AND total equity) into new a prop(s). If and when you sell those props down the road, the tax man comes a'callin for all that deferred gain from this prop, plus whatever you owe on the replacement props (unless you execute another 1031...).Of course, if you think interest in the prop will remain strong, there's no reason not to follow through with holding it as a rental for a year. If it's a good money maker, keep it. If you want to cash in, the 1031 process will be even easier.Good luck!

Dave Foster · Answer

@Jess White, in order to qualify for the 1031 exchange that @Cassi Justiz and @Clayton Mobley are talking about you must have purchased/built that property with the intent of holding for productive. That being said there is no statutory holding period. And an unsolicited offer to purchase is like the gold nugget for demonstrating intent - "My intent was to hold and I wasn't trying to sell but they made me an offer I couldn't refuse". So given that you can probably pass the intent test I'd offer the following. You start incurring costs the day the builder hands you the keys. My guess is that your buyers are looking for their own residence. In that case a pristine property is much more valuable. New construction SF rentals are not usually the best for good cash return. But most of your tax deductions are based on value of purchase.So if your goal is to reduce taxable income via write offs then you would be best served to sell this property now to an unsolicited buyer. Do a 1031 exchange and use the proceeds to leverage into more expensive properties in aggregate so more depreciation available, and are more suitable to rentals.Benefits1. Immediately save realtor commission (heck if they want the property bad enough make them pay all closing costs too)2. Tax deferral through 10313. Better NOI by purchasing better rental grade properties.4. More write offs by purchasing additional depreciationThat property's never going to look better than it does today!

Max T. · Answer

Hold it and rent for at least a year before selling so your gains will be taxed at the capital rate instead of ordinary income.

Cassi Justiz · Answer

You might check in with a CPA because you may be eligible to do a 1031 exchange if you decide to sell it. But if you are looking for decreasing your tax liability, you should have your CPA show you what your deductions could be. Between rental depreciation and any other deductions you may be eligible for, it wouldn't take long to make up for the "quick cash" that you aren't getting. Also, don't forget to consider realtor fees (if applicable), closing costs, state/county transfer taxes and any other fees associated with the sell. Those fees can eat up your profits REALLY fast.

Gus Kazek · Answer

@Jess White Rent that out! Would avoid capital gains taxes if you were to sell it immediately.

Jess White · Answer

@Cassi Justiz very true. No need to kill the golden goose too soon. Thanks for the insight