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Dear WCI community,
I have a question that is a variation on the “pay down debt vs invest” theme you often get, but with a little real estate twist.
I’m a 36-year-old finishing my orthopedics sub-specialty fellowship. I have a wife who works for pay in addition to doing the heavy lifting in raising our two young kids (ages 3 and 5). I just accepted my first attending job with a for-profit multispecialty group in a moderate-to-high cost of living area. My wife and I will have a combined income of $600k when I start. We’ve done our best to live like residents throughout my training and we plan to going forward. We’ve maxed out Roth IRAs and 401ks and have contributed to 529s for our kids. We currently have about $200k in our retirement accounts and about $40k in our kids’ 529s. We also have about $50k in savings accounts that we’re hoping to use on a down-payment on a physician mortgage. I was lucky enough to get a partial scholarship for medical school, so I only have $140k in federal student loans (which are usually at 6.8% interest, but are now at 0% through Sept 2021 due to Covid-related federal relief).
My question is about a real estate investment that I made over a decade ago. Right after the 2008 crash, my best buddy from college and I purchased a small single-family residence with a mother-in-law apartment as an investment property. Over the years, each of us has used the place as a primary residence on and off, and most recently, my family and I lived in it throughout my 5-year residency before vacating one year ago. We originally purchased the house for just over $200k, and it is now valued around $550k. We still owe $140k on the mortgage, which is at 2.75%. So, by my calculations, my wife and I have just over $200k in equity in the property ([$550k - $140k]/2 = $205k). Currently, we rent out the house for roughly twice our monthly mortgage payment, which generates roughly $500 in income for my family each month.
My question is this: given that my family has lived in the house for 4 out of the last 5 years, we can claim it as our primary residence, and thus, any proceeds from sale of the property would not be subject to federal capital gains taxes. If that’s true, what is the most prudent use of the property at this point in my career: a) hold onto the property as an income property in order to get the tax benefits from depreciation and mortgage interest deductions (leaving open the possibility of doing a 1031 exchange down the road) or b) sell the property within the time window of the next 3 years during which my wife and I could use the capital gains tax-free proceeds from the sale to either pay off my student loans entirely or invest the money otherwise (in an investment that doesn’t tie me financially to my college buddy)?
Whew, thanks so much!
I have a question that is a variation on the “pay down debt vs invest” theme you often get, but with a little real estate twist.
I’m a 36-year-old finishing my orthopedics sub-specialty fellowship. I have a wife who works for pay in addition to doing the heavy lifting in raising our two young kids (ages 3 and 5). I just accepted my first attending job with a for-profit multispecialty group in a moderate-to-high cost of living area. My wife and I will have a combined income of $600k when I start. We’ve done our best to live like residents throughout my training and we plan to going forward. We’ve maxed out Roth IRAs and 401ks and have contributed to 529s for our kids. We currently have about $200k in our retirement accounts and about $40k in our kids’ 529s. We also have about $50k in savings accounts that we’re hoping to use on a down-payment on a physician mortgage. I was lucky enough to get a partial scholarship for medical school, so I only have $140k in federal student loans (which are usually at 6.8% interest, but are now at 0% through Sept 2021 due to Covid-related federal relief).
My question is about a real estate investment that I made over a decade ago. Right after the 2008 crash, my best buddy from college and I purchased a small single-family residence with a mother-in-law apartment as an investment property. Over the years, each of us has used the place as a primary residence on and off, and most recently, my family and I lived in it throughout my 5-year residency before vacating one year ago. We originally purchased the house for just over $200k, and it is now valued around $550k. We still owe $140k on the mortgage, which is at 2.75%. So, by my calculations, my wife and I have just over $200k in equity in the property ([$550k - $140k]/2 = $205k). Currently, we rent out the house for roughly twice our monthly mortgage payment, which generates roughly $500 in income for my family each month.
My question is this: given that my family has lived in the house for 4 out of the last 5 years, we can claim it as our primary residence, and thus, any proceeds from sale of the property would not be subject to federal capital gains taxes. If that’s true, what is the most prudent use of the property at this point in my career: a) hold onto the property as an income property in order to get the tax benefits from depreciation and mortgage interest deductions (leaving open the possibility of doing a 1031 exchange down the road) or b) sell the property within the time window of the next 3 years during which my wife and I could use the capital gains tax-free proceeds from the sale to either pay off my student loans entirely or invest the money otherwise (in an investment that doesn’t tie me financially to my college buddy)?
Whew, thanks so much!
): This isn’t just about you selling - you have a partner. I would expect him to be given first right of refusal. After all, this will cost him taxes, not you (except for depreciation recapture taxed at a top rate of 25%, don’t forget). So it might be in his best interests to buy you out and live in the place for a couple of years while it (hopefully) continues appreciating. If it doesn’t, at least he made decent money off the deal, too, which is a lot better than a sharp stick in the eye.
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