Selling Rental before Cap Gains Timeline

Denver, Colorado
General Real Estate Investing
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Selling Rental before Cap Gains Timeline

Katie Southard
Member since 2024 · 46 posts · 22 votes

Moved July 31 2023

Renters lease expires 2/2025

Must have lived 2 of last 5 to avoid cap gains if sold.

I’d rather not sign a new lease and go month to month but they’ll push for it.

Worst case scenario we do, they leave 2/26 and we must sell by 8/26. 
To be honest, I’m too busy to be making this decision right now. Our life is complicated and I work a complicated stressful job, but if we’re being honest, I also don’t have time for renters, but I somehow make it work and I personally think it pays off.

Mtg: 1800

Rent: 2900

Owe: 200

Rate: 4.5 I think

Sell Price: est. 450-460

No other rentals except an in law suite on our current primary

Future goals: would love to use this properly to buy other properties to get out of the corporate rat race. 

Background: was primary residence for 10 years . Suburb of Denver, growing area, but not exploding. Primarily 3/2 first time buyer homes. Setbacks holdbacks include a crazy complicated parenting situation (husbands ex) who aggressively pursues our money. A busy marketing career. The house is only in my name at this point, which was intentional when we married, and when we moved out of it as a primary residence to hopefully avoid ex's gotta financial pursuits. Most advisors I've spoken with have said this won't really work unless we put it in an estate or LLC to keep it more private. So we had it on our personal return last year and i won't detail it but it was a bit sketch when we had to provide financials (we can redact mine but not hers long story).

We have a real estate agent and investor friend, but not sure we’ll work with him. We have a financial advisor, but he favors market money over real estate so we don’t feel fully advised on all options. I need a CPA and had a quick consult but haven’t found someone I love. I need an advisor and tax helper and confidante etc. 

We comfortably could use the cash flow but could probably survive if reduced by half but only as long as have our tenant at the primary residence. We purchased July 23, it’s a remorseful purchase in terms of quality (new build, got a 5% interest rate). 100% NOT our forever home. 

Goals: 

1.I would like all rental income off personal returns if possible. But I’d also like to own a bunch more properties, and continue this growing as a business venture and not a side hustle. Yes i know that’s a process.

2. I don’t want to die in any corporate job.

3.I want a long term goal, a midterm and a short term. And a plan to build that out. We rarely have time to discuss it, but we want to build wealth in a way that allows us to potentially work together, get out of corporate, and move to a forever home in another state in ten years when there are no longer any parenting plans governing us. So ideally, we are just building portfolio or wealth until then.


do we sell and put money in the market? 

Keep and 1031 later?

Sell and buy 2 or 3? 
Something super creative and crazy? I love a risk if it means a reward. 

we’d love to buy a rental in our future home state but recognize the complexities of that. We’d love a vacation home that airbnbs but i don’t think i have the time for that. I want to spread out whatever “wealth” we have into other properties that could potentially benefit us. Or, keep current rental at low interest rate and 1031 it at a later time. I have NO IDEA. I have not done 1031 but I know a bit.

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Melanie P.Pro Member
Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
1y

I would list the property and advise the tenants you are planning to sell. if they want to stay month to month, that's fine. But make sure they know they should start looking for housing NOW becuase the house WILL sell and they WILL be receiving a 30 day notice soon. 

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  • Ben TrageserPro Member
    Accountant · Montclair, NJ · Member since 2020 · 218 posts · 104 votes
    1y

    There are a lot of options here. It really depends on what you are looking and I think your thought process is correct. Bigger Pockets is the right place to come for resources as there are plenty on the site here.

    [email protected]
    0Reply
  • Katie Southard
    OP
    Member since 2024 · 46 posts · 22 votes
    1y
    Quote from @Ben Trageser:

    There are a lot of options here. It really depends on what you are looking and I think your thought process is correct. Bigger Pockets is the right place to come for resources as there are plenty on the site here.

    My love and my hate: options. I love that we have several ways we could go, but I’d hate to make the wrong decision. If it furthers our goal of a couple acres and a home in Texas in 8-11 years without being a slave to the system, I’m all ears.
    0Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    1y

    @Katie Southard - there's a lot to unpack here. 

    Here would be a reasonable case if you sold the property while getting the section 121 exclusion. If you sold let's say for $460k net and you've rented out the property for a little less than 2 years, you'll have some minor depreciation recapture. I would venture maybe $20k total, conservatively. The ultimate tax hit is at most $5k (20k * max 25% tax rate) and it's probably not worth it to 1031 exchange for that little of tax deferrals. It'd be better to pocket the cash in my opinion and invest elsewhere.

    It seems like there's a bit of conflict between where you are and where you'd like to be. You are working a demanding corporate job but also want to build rentals on the side. Is there a way to reduce the amount of hours so you have more time for other activities?

    I would recommend you and your husband get on the same page about future investing goals. Something I do with my wife is quarterly money dates. We discuss spending, net worth, and future investing goals with the cash. It's not perfect but it's a start and something for you both to look forward to as you continue building your life together.

    Some other questions to consider are:

    1. What do you want your ideal life to look life?

    2. What problems do you want to be solving? Do you want to be solving tenant issues, buying properties, problems at work, etc. 

    Happy to be a resource as I know all of this is challenging. You've done well with having options, now just need to decide and get on the same page. 

    [email protected]
    Brick House CPAs53 Reviews
    WebsiteView Page
    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    1y

    You forgot to say, or I missed it, how much you paid for the property. That’s the biggest part of the puzzle. 

    If you sell for $460k and it costs you say $30k to sell, you net $430k. If you paid under $230k, you’d save $30k in federal capital gains taxes and maybe another $15k or more in state income taxes. That means you’d have to make $60k? In rental income it break even with selling instead?  (Call it 20% federal and 5% state ($15k in income tax, plus the $45k in additional taxes you created.). And that’s with zero vacancy, zero repairs, zero capex. And assuming a 0% return on the $200k you could have in the bank earning $10k/year if you sold. 

    If you paid over $375k MAYBE you could keep it because the taxes saved are so low. But that also means you’re generating almost zero appreciation and barely better than bank CD returns. I’d probably still sell. 

    0Reply
  • Melanie P.Pro Member
    Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
    1y

    I would list the property and advise the tenants you are planning to sell. if they want to stay month to month, that's fine. But make sure they know they should start looking for housing NOW becuase the house WILL sell and they WILL be receiving a 30 day notice soon. 

    2Reply
  • Katie Southard
    OP
    Member since 2024 · 46 posts · 22 votes
    1y
    Quote from @Aaron Zimmerman:

    @Katie Southard - there's a lot to unpack here. 

    Here would be a reasonable case if you sold the property while getting the section 121 exclusion. If you sold let's say for $460k net and you've rented out the property for a little less than 2 years, you'll have some minor depreciation recapture. I would venture maybe $20k total, conservatively. The ultimate tax hit is at most $5k (20k * max 25% tax rate) and it's probably not worth it to 1031 exchange for that little of tax deferrals. It'd be better to pocket the cash in my opinion and invest elsewhere.

    It seems like there's a bit of conflict between where you are and where you'd like to be. You are working a demanding corporate job but also want to build rentals on the side. Is there a way to reduce the amount of hours so you have more time for other activities?

    I would recommend you and your husband get on the same page about future investing goals. Something I do with my wife is quarterly money dates. We discuss spending, net worth, and future investing goals with the cash. It's not perfect but it's a start and something for you both to look forward to as you continue building your life together.

    Some other questions to consider are:

    1. What do you want your ideal life to look life?

    2. What problems do you want to be solving? Do you want to be solving tenant issues, buying properties, problems at work, etc. 

    Happy to be a resource as I know all of this is challenging. You've done well with having options, now just need to decide and get on the same page. 


    Great questions. I know what my ideal life looks like in ten years, unfortunately, I don’t feel like I can have my ideal life now because I am having to stay in the state that I am in until we can move without risk of my husband losing custody of his child, which will be in about 10 years so believe it or not I do spend a lot of time thinking about what I want the future to be like. We’d have a regularish house, a few acres (maybe more), gardens, alpacas, chickens. 

    We currently have Chickens in suburbia that are secret, lol, and I’m an avid gardener. Ideally, I’d be buying and selling and potentially managing properties as a job, and be working the gardens and hobby farming, potentially attending farmers markets on weekends (we both love to create things). But we are also both very used to corporate and used to having a security of a job. I am more likely to take a risk, but i suspect when my husband is out from under a controlling baby mama, he won’t mind a little risk either.

    I love Texas, try to vacation there often and my husband is aligned with Texas farm property as a ten year long term goal.

    I’m also passionate about the trades and if i could do it all again I’d be part owner of some kind of builder or remodeler or specialty trades business.


    0Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    1y
    Quote from @Katie Southard:
    Quote from @Aaron Zimmerman:

    @Katie Southard - there's a lot to unpack here. 

    Here would be a reasonable case if you sold the property while getting the section 121 exclusion. If you sold let's say for $460k net and you've rented out the property for a little less than 2 years, you'll have some minor depreciation recapture. I would venture maybe $20k total, conservatively. The ultimate tax hit is at most $5k (20k * max 25% tax rate) and it's probably not worth it to 1031 exchange for that little of tax deferrals. It'd be better to pocket the cash in my opinion and invest elsewhere.

    It seems like there's a bit of conflict between where you are and where you'd like to be. You are working a demanding corporate job but also want to build rentals on the side. Is there a way to reduce the amount of hours so you have more time for other activities?

    I would recommend you and your husband get on the same page about future investing goals. Something I do with my wife is quarterly money dates. We discuss spending, net worth, and future investing goals with the cash. It's not perfect but it's a start and something for you both to look forward to as you continue building your life together.

    Some other questions to consider are:

    1. What do you want your ideal life to look life?

    2. What problems do you want to be solving? Do you want to be solving tenant issues, buying properties, problems at work, etc. 

    Happy to be a resource as I know all of this is challenging. You've done well with having options, now just need to decide and get on the same page. 


    Great questions. I know what my ideal life looks like in ten years, unfortunately, I don’t feel like I can have my ideal life now because I am having to stay in the state that I am in until we can move without risk of my husband losing custody of his child, which will be in about 10 years so believe it or not I do spend a lot of time thinking about what I want the future to be like. We’d have a regularish house, a few acres (maybe more), gardens, alpacas, chickens. 

    We currently have Chickens in suburbia that are secret, lol, and I’m an avid gardener. Ideally, I’d be buying and selling and potentially managing properties as a job, and be working the gardens and hobby farming, potentially attending farmers markets on weekends (we both love to create things). But we are also both very used to corporate and used to having a security of a job. I am more likely to take a risk, but i suspect when my husband is out from under a controlling baby mama, he won’t mind a little risk either.

    I love Texas, try to vacation there often and my husband is aligned with Texas farm property as a ten year long term goal.

    I’m also passionate about the trades and if i could do it all again I’d be part owner of some kind of builder or remodeler or specialty trades business.



     Totally fair. Your situation has quite a bit of nuance for sure. I hope you can achieve your ideal lifestyle. Have you considered buying a business in the trades? There are 10% SBA loans to purchase businesses. Of course, you would need to do your own research and due diligence when purchasing a company but perhaps that's a way to get involved in the trades in the owners seat. Perhaps you could roll the housing equity into a smaller business. Given your husband's expertise in marketing, you probably have the skills to grow a business. 

    [email protected]
    Brick House CPAs53 Reviews
    WebsiteView Page
    1Reply
    • Katie Southard
      OP
      Member since 2024 · 46 posts · 22 votes
      1y

      @Aaron Zimmerman you read my mind. That would be an ideal scenario. My problem is knowing who to trust and where to start to find actual deals.

      0Reply
    • Katie Southard
      OP
      Member since 2024 · 46 posts · 22 votes
      1y

      @Aaron Zimmerman and clarify, I am the marketer, my husband designs lighting. I have legal background, billing, office and executive assistant type experience, and now many years of marketing experience as well.

      0Reply
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