No announcement yet.

Please help me choose best course of action

  • Filter
  • Time
  • Show
Clear All
new posts

  • Please help me choose best course of action

    Good morning everyone,

    I am not versed in real estate transactions, so please be gentle.

    I live in a very high COL area and own a expensive large condo which was purchased very well in 2013. The condo had appreciated significantly since that time (~$400k). My family is growing and we are currently looking to purchase a single family home. The condo is located in a great area, great public schools, safe neighborhood where prices didn't really go down even in 2008. Strong rental market. Initially, I thought to rent the condo out and keep it as investment property. Now I am having second thoughts. If I rent it out, I can get ~500/month after covering mortgage/ins/property tax/property management fees. My questions:

    1. We've lived here for over 2 years. My understanding is that I'd have to pay full capital gains tax on appreciation due to not owning it for less then 5 years. Correct?

    2. The property we will be purchasing is more expensive as compared to our current one. As I understand it, 1031 exchange can't be used in this transaction.

    3. If we do end up keeping it, any tips on how to set up a rental correctly? Any resources you'd recommend? I already learned to have a general liability ins on a rental and increasing my umbrella (Thanks WCI forum members!).

    4. Condo has lots of upgrades (previous owners really outdone themselves). I am afraid the renters will "destroy" it. Any tips on how to best rent out a more premium real estate?


    Thanks guys!



  • #2
    Good for you, RJ.  Most of the real estate stories we have are downers.

    Some answers for you:

    1. Assuming you are married and have lived there 2 or more years, no capital gains.  You must have occupied the property 2 of the previous 5 years.  So if you were to move out and sell within 3 years, you would still be OK.  Marriage comes into play because you can exclude $500,000 in capital gains if married, $250,000 if single.

    2. 1031 is for investment properties / business use.  Since you don't need to worry about capital gains, this is a non-issue.  If you choose to keep the condo as a rental property for more than 3 years, it could come into play.

    3 & 4. I've been an unintentional landlord on a couple places where we once lived.  There were no major problems with tenants, but there are many small issues to deal with.  Hot water heater went out, tile was cracked, ceiling fan too noisy, months with vacancy and the extra paperwork to track all expenses, etc... There are property management companies that can deal with some of those issues, but they'll eat up most of the profit you're expecting.  If I were in your shoes, I would sell and put that $400,000 to work in the stock market or as a down payment towards your new home.



    • #3
      I can't answer all of your questions, but here is what I know:

      1. You would owe zero capital gains tax if you sell within 3 years. The rule is you have to have lived in it as your primary residence for 2 of the last 5 years when you sell to get the exclusion. This is up to $250k gain per spouse, so you would not exceed that threshold whether the property has increased in value $400k or is worth $400k (couldn't tell from your post).

      2. Correct, 1031 is not applicable for residences, but given my answer above, there is no reason to consider anyway.

      3. Set up in an LLC if you keep it. has great resources for landlords. I have used this site for at least 20 years.

      4. That's partly luck and a good screening process, including checking out references. Air-tight contract that allows you to inspect the property, no pets, limit the # of people who can live there, and a big deposit.

      You need to do some calculating to compare benefits of investing the money (or paying down debt or whatever) or being a landlord. Cash flow is not the same as profit. It would be hard for me to pass up a few hundred thousand tax-free profit. Don't forget to estimate the value of your time. Portfolios don't call you at 3am with a broken water pipe.

      I guess I answered all of your questions, after all :-) . I'm sure others will jump in with more in-depth analysis. This is a situation in which I would suggest you use a CPA or EA with knowledge in this area.

      (ps - was I gentle enough?)
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087