Oceanside Condo - Sell or Keep Renting - Capital Gains Timing

[Account Closed]

Hi Everyone,

I'm planning the next couple of years and could use some advice.

My wife and I both bought condos (hers in Oceanside, mine in Poway) before we started dating. Once we got married, she moved into mine and we've been renting out her place. The current renters are planning to leave in February 2021, and the window to sell it and pay no capital gains tax for it being a primary residence would be August 2021. So I need some advice on whether to keep it as a rental or sell in the spring.

We currently have a 3 month old and are planning on having 1 (or 2) more kids over the next 5 years. Our current condo is a 2Br/1.5Ba - which currently works for us but will not work when Kid # 2 arrives. With somewhere between 1-2 years before I am anticipating we will start looking for a new place, I would like some wisdom on how to prep.

Key Personal Details
W2 Income After Tax, Contributions and Benefits: $6000/mth

Expenses: $3800/mth
Rental Income: $2000/mth
Rental Expenses: $1700/mth
Current Cash Flow: $2,500/mth

Property 1 (Primary Home - Poway)
Market Value (Zillow): $440,000
Current Mortgage: $187,000
P&I: $780/mth
HOA: $415/mth
Prop Taxes: $260/mth
Prop Mgmt: $75/mth
Projected Expenses: $100/mth
Projected Rent: $2200/mth
Projected Cash Flow: $570/mth
Estimated Gain if Sold: $253,000


Property 2 (Oceanside Rental)
Market Value (Zillow): $350,000
Current Mortgage: $206,000
P&I& Prop Taxes: $1300/mth
HOA: $350/mth
Prop Mgmt: $75/mth
Average Expenses: $50/mth
Actual Rent: $2000/mth
Cash Flow: $225/mth
Estimated Gain if Sold*: $144,000


Other Assets:
$270k Pre-Tax Retirement
$45k Post-Tax Retirement
$60k Taxable Account
$40k Cash on Hand

I genuinely enjoy my job and appreciate the benefits associated with it - company is currently WFH but don't expect that to be permanent. So far we've enjoyed being landlords, we've had 2 great tenants and our property manager has been on top of things. 

The secondary question to this is when I decide to move where to end up. I'd like to minimize the commute if possible (Sabre Springs for Work), but it seems like reasonable SFH prices requires going to Fallbrook.

What would you recommend?

[Joaquin K.]

It sounds like you are in a great situation.  It's nice to have a few good options.  The primary residence tax exclusion cannot be beat, and even trumps the 1031 deferment.  I don't know your tax bracket, but putting $144K in your pocket is probably equivalent to earning $200K through taxable income.  Taking this money off the table would be smart, and allow you to reassess your strategy without a tight (1031) timeline.  You could spend a few months considering whether you want to purchase a larger property in Poway, or make another investment.  

If you choose to invest, there are many ways you can cash flow more then $225/month with ~$140K down.  Oceanside appreciation has been fantastic, but I do not believe SoCal coastal appreciation can continue at the current rate for the next 5 years.  That said, I have coastal investments myself and continue to be bullish for the long-term.