Should I sell now and lose money to save more in the future?

Question

I currently have a SF rental house that I’ve owned for about 6 years. It’s worth 180 – 185ish and still owe 126k. If I sell it, roughly how much would I have left after listing, fees, commissions and taxes if I don’t do a 1031 exchange to buy land and build an O/O duplex within the next 2 years?

I’m currently netting $400 in rent and will lose that income after selling the house until everything is done at the new duplex but a future tenant will be paying for my mortgage for my new residence.

Is it really worth losing money now to know that in the future my mortgage where I will be living will be paid for by the tenant? I still have a W-2 job and that would free up more personal income.

I was finally able to convince my wife and explaining that “our” side will be our dream home with an en suite and soaker tube, walk in closet, huge pantry, granite counter tops, yadda yadda (sorry . . . old Seinfield episode).

Thanks

Sean N. · Answer

I didn't think about the depreciation recapture. Right now Grand Rapids is a hot market even in these uncertain times so thought I would be able to get the most out of the rental house if I sold it. Not tired of being a landlord since I manage 2 other duplexes myself in the area. As the old saying goes “build it and they will come” to me means if I build a duplex with the right tenant in mind I shouldn’t have any problems and target a tenant that is looking for a nice place. I think somethings can be under the “Mrs Murphy Law” to some if little degree as well to have the right tenant (if I understand it correctly).

Sean N. · Answer

i knew there would be some questions to fill in the gaps for more detail which is great. My first post was mainly to get the ball rolling. The rental is just a single family. We currently live in a single family with a lot of equity I'll be able to pull to start construction when that time comes. But yes, I am aware of the 50% homestead for property taxes.

Adam Martin · Answer

The biggest question to ask yourself is why would you sell it. You mention that it is flowing 400/month but later state that you will be cash flowing more per month, how is that? If its that you just don't like being a landlord anymore, you see expensive maintenance coming up and you are trying to get out from under it, or are just no longer comfortable with the risks it makes sense to sell as well as if you just think your market is peaking and you want out. I would suggest laying out all the pros and cons with you and your spouse and decide which makes more sense. If you buy the land to build the duplex you and your wife will also have to carefully consider if you want to househack and how close you really want to be to your tenants since you mentioned your spouse required convincing. I would also suggest speaking to a CPA to see how this will affect your taxes however I assume between that, depreciation recapture, commissions, and repairs there may not be as much left over as you hope.

Joe Villeneuve · Answer

Where are you losing money?Understand that money is a moving object when best used. When it is stationary, is when it is losing value.

Erik W. · Answer

Hi @Sean N.,Good question! First, I'll have to answer as if I were in your situation: there's no way I could ever convince my wife that a duplex is "our dream home." How do I know? I tried. ;-) But it sounds like your wife is different if you got her convinced. Don't be surprised though if you go thru this deal and 1-2 years from now she's tired of living next door to your tenant. Some people are built for that. My wife isn't.Regarding how much will money will you spend to sell and transfer profits: much will depend on how much depreciation recapture you have to pay. Typically, it's 25% tax paid on the amount you've depreciated to date, but if you've done other capital improvements that will increase your basis and should help offset some. Not enough information to know for certain.Typical transaction costs for selling a property (commission, fees, etc.) run between 8 -10%. Could be more if your Buyer asks you to cover some or all of their closing costs.Moving from house A to house B costs: 2-3%. Are you currently living in the rental? Is it a duplex also?As you can see, there are a lot of variables, so I can't give you a really good answer. I recommend asking a CPA. For $50-$100, he should be able to plug in your numbers and give you accurate information.Keep in mind that by living in the duplex, you can now only depreciate half of the property after land costs.Good luck!