Should I sell my Rhode Island Duplex or Hold it

Question

I bought my duplex 2 years ago for a excellent deal. The property is a townhouse style duplex with hardwoods throughout, updated kitchens, and 3 bedroom 1.5 baths per unit.

Fair market rent is about $1800 per unit and it’s located in the Phenoix area of West Warwick. Coventry/West Warwick Line.

It’s been a great property. I live in one side and rent the other to a low maintenance tenant. However, I am wondering if I should sell the property and take the roughly 130k tax free capital gain and invest it into other properties in another location in RI.

Although the property is super nice, I am concerned about attracting low maintenance tenants in the future and I’m worried the location won’t see much appreciation as there’s not a ton of stuff in West Warwick and I’m unsure about what the future holds for this town. Will it appreciate or should I invest elsewhere?

Any feedback would be awesome. I’m at a crossroads.

Tanner Sherman · Answer

Christopher,I am not an attorney but my understanding is that you could do a split use 1031 exchange where the side you live on would be tax free but the leased side would be tax deferred. I would suggest getting someone smarter than me to explain the difference. If you have no desire to hold the property then I would start talking to a 1031 attorney to explain your intentions. If you think the property will cashflow if you can refinance and pull some cash out, it doesn't necessarily need to appreciate to be worth keeping. This depends solely on your investing goals. If it were me, I would do a cashout refi, take that money and use it as a downpayment on another house hack and rent out the duplex. If you are worried about dealing with the tenants then hire a property manager as it is worth the small monthly payment. The debt paydown would be worth holding on to the property.

Bud Gaffney · Answer

@Christopher Lynch hold that bad boy

Dave Foster · Answer

@Tanner Sherman, Whether it's a duplex or two connected units owned by the same person the issue would be the same. the use of the property is reported on the persons tax return. In the case of condominiums one condo would be @Christopher Lynch's primary residence. and the other unit an investment property. So same treatment.

Tanner Sherman · Answer

Well that answers my question! Glad I was on the right track. If it is a side by side, would there be any tax advantage to converting to condo or is it treated the same in a 1031?

Anthony Thompson · Answer

@Christopher Lynch it sounds like you got a decent deal on this property. If you sell, what will you do with the money? Will you be able to find another deal that’s as good? You would want to check with your tax professional, but as far as the exclusion of the 130K gain due to it being your primary residence, my understanding is that since you are renting half of the property only half of the gain would fall under the exclusion and you might be looking at capital gains tax on the other half of the gain if you sold. Instead of selling, you could refinance and pull some of the equity out to invest in another property. That would let you add more units without losing the ones you currently have. You could try to do a 1031 exchange to avoid paying the capital gains on half of the sale but I can tell you from personal experience that it’s very stressful to try to do a 1031 in this market. No one has a crystal ball as far as which areas will appreciate more or less. I know that West Warwick has always traditionally had a lot of rental demand so I would imagine the property should hold its value pretty well. My only concern would be that I’ve heard property taxes there have gone up quite a bit, but to be fair you’d have to compare that to other parts of Rhode Island.As far as high- versus low-maintenance tenants, that has as much to do with your tenant screening (if not more so) then the particular area. It’s true that a C area will tend to attract more challenging tenants, but that’s part of paying less per unit for the property in those areas. If you pay more for a nice property in a nicer area, you will tend to have less challenging tenants, but you’ve paid more for it. My recommendation would be that if you were interested in a different part of Rhode Island that you try to do a comparison between West Warwick and the other area. But again, under the refinance scenario you can have your cake and eat it too by using some of your equity to acquire property in a different area while keeping the one you have.

Joseph Hummel · Answer

@Christopher LynchThe reason you want to consider selling seems mainly that your uncertain if the town will continue to support the rent amount?I’ve heard quite a few investors capitalize on smaller towns because other investors are afraid. Maybe refi if you need cash out of, keep it fixed up nice to keep getting high end rent and tenants, rent both sides, once it’s paid down it’s going to be more valuable.

Dave Foster · Answer

@Christopher Lynch, If you sell and have lived in it for 2 out of the last 5 years you will get the portion of gain allocated to the side you live in tax free. And you can also 1031 the other side. So it is possible on this sale to get some gain tax free and indefinitely defer the tax on the rest. It doesn't get much better than that.

Basit Siddiqi · Answer

@Christopher LynchPlease note that the whole sale will not be tax free since you are selling a duplex.Best of luck

Christopher Lynch · Answer

Yes exactly. The property itself is great. I’m just unsure about the future of the city itself.

Tanner Sherman · Answer

Wouldn't his side be subject to the 2/5 rule? No capital gains on it because he has lived in it for two out of the last 5 years?