Sell or Keep the rental?

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Hi All,

Need help figuring out to sell or keep a rental we own in a different state:

Original Purchase Price: 195K
Current Loan Balance: 160K
Current Interest rate: 4.05 %
Current Estimated Property Value: 250K
Monthly Mortgage Payment: 1007
Monthly HOA Payment: 175
Monthly Rent: 1750
Property Management Fees: 175
Cash Flow: 393

The property is an excellent school district which I have been renting out for the last 3 years and has never been on the market more than week before getting rented.

Should I keep renting it out/Sell it (anyway to avoid the tax hit)/tap into the equity to buy another rental or a primary residence?

I currently live in a different state and kind of screwed up not buying the house in 2013. Now the prices are up significantly and I am worried buying at the current price levels. So renting at a pretty decent rental rate.

Thank You.

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Keep renting.

BAREBEL said:   
Current Estimated Property Value: 250K
...
Monthly Rent: 1750

It doesn't meet the 1% test. Would you buy a $250k house to rent it out for $1,750 if you didn't already own it?

I'd sell it, especially considering your cost basis and potential tax liability.

So you rent your own house now and would like to buy a house to live in.
This isn't just a buy/sell choice for the rental.
Its choosing between 1) sell the rental and buy a primary house or 2) keep the out of state rental and continue to rent your own home.
Right?

How much does the rent cost you in your house and how much to houses cost locally?

Can you afford to buy a house without selling that rental?

What state/city is the rental and where do you live now?

supersnoop00 said:   It doesn't meet the 1% test. Would you buy a $250k house to rent it out for $1,750 if you didn't already own it?

I'd sell it, especially considering your cost basis and potential tax liability.

 After I read this 1% rule is when I decide to start this thread and ask the experts. If I sell it I will have to pay taxes on the proceeds or is there a way I can avoid that?

jerosen said:   So you rent your own house now and would like to buy a house to live in.
This isn't just a buy/sell choice for the rental.
Its choosing between 1) sell the rental and buy a primary house or 2) keep the out of state rental and continue to rent your own home.
Right?

How much does the rent cost you in your house and how much to houses cost locally?

Can you afford to buy a house without selling that rental?

What state/city is the rental and where do you live now?


Thank you for your response.

I ended up being an accidental landlord when I moved because of a job change. I couldn't sell the house as I was underwater back then so decided to rent instead of taking a hit.
I can afford buying a house without having to sell the rental but since the housing prices have gone up so much I am kinda worried to pull the trigger now. 
I currently pay 1700 in rent which might go up by another 150 upon renewal in May 2017. The houses we like are in the 375K to 475K area. So I was wondering if selling the rental and using the proceeds to buy a house worth it, partly not to exhaust my savings, partly to offset the higher house prices and partly to avoid paying taxes if that is possible at all.

We currently live in Atlanta, GA and the rental is in NC.

If you have lived in the home at least two of the last five years, you may be able to exclude the capital gain from your taxable income.

http://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html

I'd probably sell it then.

If you want to continue to invest in real estate then you can do buy another rental local in Atlanta area and probably do just as well in returns and have it local so its easier.

cleanbeat said:   If you have lived in the home at least two of the last five years, you may be able to exclude the capital gain from your taxable income.

http://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html

  I lived in this house from 2010 March to 2013 March. Its been rented since March 2013. 

BAREBEL said:   
cleanbeat said:   If you have lived in the home at least two of the last five years, you may be able to exclude the capital gain from your taxable income.

http://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html

  I lived in this house from 2010 March to 2013 March. Its been rented since March 2013. 

  Better list that puppy quick then.

jaytrader said:   
BAREBEL said:   
 
  I lived in this house from 2010 March to 2013 March. Its been rented since March 2013. 

  Better list that puppy quick then.

  Looks like he has 4 months to unload before that rule is void.

forbin4040 said:   
jaytrader said:   
BAREBEL said:   
 
  I lived in this house from 2010 March to 2013 March. Its been rented since March 2013. 

  Better list that puppy quick then.

  Looks like he has 4 months to unload before that rule is void.

Correct me if my math is wrong, but:

5 years prior to today is December 2011
Over the past 5 years, OP lived in the house from December 2011-March 2013. That's 15 months, not 2 years.

It appears that the OP has not lived in the house for 2 of the past 5 years.

BostonOne said:   
forbin4040 said:   
jaytrader said:   
BAREBEL said:   
 
  I lived in this house from 2010 March to 2013 March. Its been rented since March 2013. 

  Better list that puppy quick then.

  Looks like he has 4 months to unload before that rule is void.

Correct me if my math is wrong, but:

5 years prior to today is December 2011
Over the past 5 years, OP lived in the house from December 2011-March 2013. That's 15 months, not 2 years.

It appears that the OP has not lived in the house for 2 of the past 5 years.

  You are right. I have not lived there 2 of the last 5 years so I have to recapture the depreciation of ~20k and pay taxes on the gains. I think I can avoid paying taxes if I buy another rental and use the 1031 exchange but that is not likely at this point. Also the realtors will charge additional fees
 

I didn't read all of the OP, but I'd base my decision on what alternatives I have. Figure your investment return on the rental, if you can do better in something else, then sell. Otherwise, keep it.

I "double ditto" Traveler on not reading the whole thing... If it were me, I wouldn't want a rental in another state. Really, I wouldn't want a rental, but that's me.

I've heard of people doing a 1031 exchange into a REIT. I am not a tax attorney or anything like that, so take it with a grain of salt and look into it for yourself. REITs in general, are pretty pricey right now, so maybe not the best option... speaking of options... 1031 into a REIT and buy a long term put on the REIT at the same time??? I'm sure there are all sorts of ways to hedge a REIT purchase.

I agree with the folks above advocating to compare to other opportunities. I'd also factor in your time. Rentals suck up time. What is that worth? That was a huge deciding factor for me as to whether or not to get into rentals. For me, my time is just too valuable. Buying stuff that doesn't suck up my time is worth a lot to me.

debentureboy said:   
I've heard of people doing a 1031 exchange into a REIT. I am not a tax attorney or anything like that, so take it with a grain of salt and look into it for yourself. REITs in general, are pretty pricey right now, so maybe not the best option... speaking of options... 1031 into a REIT and buy a long term put on the REIT at the same time??? I'm sure there are all sorts of ways to hedge a REIT purchase.

 

  
You can't convert real estate directly into a normal REIT via 1031 exchange.    

There is a thing called an UpREIT that you can buy into via 1031.  UPREIT are similar to normal REIT but not exactly the same.

I don't worry too much about the 1% rule - in my area, it seems very hard to come by at least for quality SFH. Our rentals also started out as our residence, so we never looked to minmax purchase vs rental price. But if yours is also out of state, and the hefty HOA sounds like it is probably a condo or townhome. In my - again locally limited - experience, those don't appreciate as well as a SFH. I agree with the posters who recommend selling. If you want to be a landlord, doing it locally makes it a lot easier and more profitable, and you could start looking for opportunities as you like.

BAREBEL said:   BostonOne said:   
forbin4040 said:   
jaytrader said:   
BAREBEL said:   
 
  I lived in this house from 2010 March to 2013 March. Its been rented since March 2013. 

  Better list that puppy quick then.

  Looks like he has 4 months to unload before that rule is void.

Correct me if my math is wrong, but:

5 years prior to today is December 2011
Over the past 5 years, OP lived in the house from December 2011-March 2013. That's 15 months, not 2 years.

It appears that the OP has not lived in the house for 2 of the past 5 years.

  You are right. I have not lived there 2 of the last 5 years so I have to recapture the depreciation of ~20k and pay taxes on the gains. I think I can avoid paying taxes if I buy another rental and use the 1031 exchange but that is not likely at this point. Also the realtors will charge additional fees
 

Did you move for work? If you qualified to write off moving expenses, you should be eligible to pro-rate the 2-out-of-5 year tax exemption.



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