Considering selling my STR - Some tax questions - Some general

[Andrew Simms]

I have a mountain cabin in WNC. I really enjoy running the STR, providing great value for our guests and ensuring they have an excellent time. There's something fulfilling in it. That said, it is a financial decision first and foremost. We have an opportunity to buy-out one of the partners in our family farm. Just assume there is not a return involved in that. Just a personal desire to do this (many reasons, likely none of which are important to the awesome folks on this forum). We could probably manage the payments without selling the cabin; however, it would provide significant cushion and allow us to pursue some other opportunities.

Financial Details:

Purchase price: $264k (February 2021)... probably put in $36k to be rent ready. Based on my records, we did $11,550 in depreciable improvements. Interest rate: 2.875%. Insurance $1200/yr. Taxes $1200/yr

Net Income: 

2022 = $6,274 (before depreciation); Gross $51k; 62% occupancy

2023 = $5,236 (before depreciation); Gross $45k; 57% occupancy

2024 has seen so far, a decline in bookings. But that was kind of expected given the time of year. Things usually pick up starting in April. We also opened up to dog friendly. 

We have had nothing but 5-star reviews on VRBO, and nearly all 5-stars on Airbnb. Our cleaner has indicated we are one of her busiest clients. 

Potential Sale price per our realtor: $469k-$489k. I had looked up comps before her CMA and can confirm this is reasonable. It is also in line with some properties that are currently for sale. Ours has some features that probably give us an edge.

I know I will owe taxes here and hopefully someone can shed some light on that. My numbers may not be spot on, but assuming:

Sale price of $469k (6% agent fees), basis of $264k, Total deprecation taken $24,600 (adjusted basis $239.4k). Amount subject to capital gains and depreciation recapture: $469k * 0.94 - 239.4k = $201,460.

I would owe depreciation recapture (25% rate x $24,600 =$6,150), capital gains (15% rate so $26,500), state tax (North Carolina 4.75% so $5,100). 

Are capital gains taxes progressive? For instance, is the first 94k (we are MFJ) at 0% and the next at 15% or is it all 15%. Our AGI is likely over $250k this year, so we would also have the 3.8% medicare surtax I believe. How is the surtax applied? 

I have probably rambled on enough. BP fam - what would you do? Not looking to 1031 because I can't with the family farm structured the way it is. Any questions - fire away! Thank you all in advance. 

[Travis Timmons]

You're asking the question because there is a real case to be made for both sides. Selling it and buying a greater share of the family farm makes your life better. You cash in on your great decision, lower financial stress, and do something that you've likely thought about doing for a very long time. My dad and brother run our 6th generation farm in the Midwest. I get the value of that and why you would want to do it. 

On the other hand, there is this feeling that you got an STR when the getting was good. That window, while not completely, has closed a bit. Once you let it go (and the rate that comes with it), you're not getting it back. You're also likely to keep checking the market value for that property for years to come. In 10 years when it is worth $750k (or whatever the number will be), you may have a dumb feeling of regret wondering why you didn't just find a way to do both.

I don't know...if it were me, I'd try to find a way to make a little extra income and do both. Or get more flexible terms for buying out the extra share of the farm. Either way, be proud of what you accomplished. You likely turned a down payment of $26-65k (10-25%) + 36k to get it market ready into a walk away, after tax profit of $200k-ish in 3 years. I know that appreciation feels more lucky than good in most cases, but you crushed it on that purchase.