Selling Rental before Cap Gains Timeline

[Katie Southard]

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.

[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.

[Katie Southard]

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.

[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. 

[Bill B.]

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. 

[Melanie P.]

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.