Purchasing new Primary Residence, keep current or rent? Thoughts?

Question

Currently we are looking at a new Primary residence around $700k. Current primary appraises around $625k and I owe $100k on it. We currently have one significantly cheaper rental that has been working out well and has put this idea into my head. I've got at 2.29% rate on the current primary and a mortgage payment all in of about $2600. Not many comp rentals in the area of this size to compare to but I'm expecting I can get around $3,500-3,800 in rent.

The flip side of having to take a 7% rate on the new home with only a $100,000 down is weighing heavily on me. I'd imagine the appreciation on my current house over the next few years (if I rent) will wash a lot of that interest away? What would everyone do in this situation?

David Krulac · Answer

We have done both.  The first house I bought (detailed in BP Podcast #82) I house hacked from day one, then moved out and rented the whole house for the next18 years, then sold and did a Section 1031 exchange.  The second personal residence that I bought was a two unit and lived I one and rented the other.  When I moved out I then rented the whole property and subdivided the back yard and did a land development plan for building 17 new houses.  Then the third personal residence I bought paid $139,000 and lived there for a long time and sold for $500,000 cash in two days and used the Section 121 tax free sale.  This provision allows $250,000 tax exclusion for a single person or $500,000 tax exclusion for a couple.  imho the 121 and 1031 are two of the best features of the tax law benefitting real estate owners.  I would highly recommend using either or bath provisions.

David Krulac

Bigger Pockets Podcast #82

Bill B. · Answer

Get married! Then you get $500k exemption.

Putting the money towards a new home doesn’t help.

yes you can add those to basis, I do not know if you’re allowed to use estimate, ,but probably not. I would try to find receipts, at least contact credit card company or bank for checks or CC receipts. You’ll basically save 20% of every receipt you find.

But definitely means you should seriously consider selling as it would take a long long time to make up $50k in taxes.

Ps. Selling costs come off gain too, it’s your net not your gross selling price.

Jay Thomas · Answer

Renting out your current home can help you make more money to cover your mortgage. But it means more work, like finding tenants and fixing things. Buying a new house can make your life better, but it might mean paying more each month because of higher interest rates and other costs when selling your old house. It's a good idea to talk to a local real estate agent and a money expert. And be sure to do the math carefully before you decide.

Bill B. · Answer

More important than what you owe on your current home is why are you moving and what did you pay for it.

If you’re moving for a lifestyle upgrade or other non-financial reason go ahead and move. (Since it sounds like the new home is more expensive.)

Now the important question is what did you pay for it? If you have a gain over a couple hundred thousand I’d’ pry sell. Every $100k in gain up to the limits, $250k (if single) or $500k (if married) will save you $15k in federal taxes and I’m guessing $5-10k in state taxes? So if you have $200k in gains you’d have to make $50k on your rental NET, after expenses. So you can pay $10k in taxes and be back to where you would be today by selling. Except you’d also have to make up the interest expenses on that extra $500k you borrow, so you have to make that plus $2,500/mo profit (another $30k) to pay the interest.

So if you think you can net say $45k/yr in profit it will take you 3 years to break even if you ignore income taxes. Most rentals won’t bring in $4k/mo in profits. (Not rent, profits after expenses.)

Michael Kaminski · Answer

Ok so I'll be netting more then $250k in capital gains. I have two questions, any home improvements I made like finishing my basement I know I can add to the cost basis of the home, do I need to have receipts for all my drywall, lumber , etc or can I just use a good faith estimate? Also, if I plan to apply that equity to the new home in a form of down payment, am I still taxed? Obviosuly trying to find a way to negate taxes on the cap gains over the $250k limit.

Michael Kaminski · Answer

Already got a HELOC setup, haven't used it, rates almost 8% so wouldn't make sense to use it for DP money on new house if that was what you were suggesting.

Caleb Brown · Answer

If it was me I'd maybe keep your current and rent it out. If you want to tap into the equity I'd do a HELOC to keep the cheap rate. You do have a ton of equity so it stinks to keep it locked in.

Purchasing new Primary Residence, keep current or rent? Thoughts?

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