Looking for advice on Selling or not Primary converted to rental

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Hello All, i am looking to get some advice from the FW community on if i should be selling or not my primary that was converted to a rental, my main concern is capital gain taxes.
I purchased my first home in phoenix AZ in Feb 2011 for 208,500 with a 30-yr mortgage at 4.35% and 10% down, i refinanced this home in Sept 2012 with a 15yr loan and 3%. I got a job offer to move to the Cleveland OH area, i took it and moved from my house in August 2016. Instead of selling the house in August 2016 i converted it to a rental which rented in record time (less than 3 days). Current rent is 1700/month 1-year lease thru Aug 2017 no issues, rent pays for mortgage and fees, not much cash flow ( i am Ok with that), house is appreciating and building equity by paying off the mortgage. Current home Zillow estimate is 320K, remaining balance on loan is 133.5K
As part of the deal moving to Ohio, the company pays the realtor fees and closing costs for selling this house, my benefit expires early June 2017.
The one thing that i did not think about when converting the property to a rental is that if i sold it as a Primary i can exclude the gains and not have to pay taxes on capital gain, i though that renting it for 2-3 years is still better than selling as the mortgage is getting paid and house appreciated more than the value of company paying for fees.
1. Sell the house before mid June, to use the company benefit but need to figure out what to do with tenants 
2. Keep the house and sell in less than 3 years from converting, loose company benefit of paying fees but still don't have to pay capital gain by using IRS publication 523 (this is critical as it is not very clear to me if i can still exclude capital gain up to 3 years from converting or if i have lost the ability to exclude as soon as i have converted)
3. Keep the house as investment longer term, later pay capital gain, loose company benefit

If this helps:
Married, 1 child and one on the way, wife stay at home, my income ~190K, Above 800 credit score for both myself and Wife. Purchased home in the Cleveland area for 400K, 2.75% 15 years 20% down.
I Max my 401K, Deffer 5% of my salary, also own another rental property in phoenix area (purchased for 150K in 2012, been rented since ~1400 rent, mortgage is 15yrs 3.5% still owe ~98K current Zillow estimate is 230K) I manage both rental properties remotely, but have good Handy friends in Phoenix who i pay to go do repairs/maintenance

Your advice is appreciated

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For a long distance rental with no cash flow, plus some special benefits for selling soon, I think I'd sell it. You haven't had to deal with finding a new renter or dealing with a significant repair - wouldn't those be a huge hassle for you? That alone would probably be enough for me to sell.

moumimou said:   Hello All, i am looking to get some advice from the FW community on if i should be selling or not my primary that was converted to a rental, my main concern is capital gain taxes.
I purchased my first home in phoenix AZ in Feb 2011 for 208,500 with a 30-yr mortgage at 4.35% and 10% down, i refinanced this home in Sept 2012 with a 15yr loan and 3%. I got a job offer to move to the Cleveland OH area, i took it and moved from my house in August 2016. Instead of selling the house in August 2016 i converted it to a rental which rented in record time (less than 3 days). Current rent is 1700/month 1-year lease thru Aug 2017 no issues, rent pays for mortgage and fees, not much cash flow ( i am Ok with that), house is appreciating and building equity by paying off the mortgage. Current home Zillow estimate is 320K, remaining balance on loan is 133.5K
As part of the deal moving to Ohio, the company pays the realtor fees and closing costs for selling this house, my benefit expires early June 2017.
The one thing that i did not think about when converting the property to a rental is that if i sold it as a Primary i can exclude the gains and not have to pay taxes on capital gain, i though that renting it for 2-3 years is still better than selling as the mortgage is getting paid and house appreciated more than the value of company paying for fees.
1. Sell the house before mid June, to use the company benefit but need to figure out what to do with tenants 
2. Keep the house and sell in less than 3 years from converting, loose company benefit of paying fees but still don't have to pay capital gain by using IRS publication 523 (this is critical as it is not very clear to me if i can still exclude capital gain up to 3 years from converting or if i have lost the ability to exclude as soon as i have converted)
3. Keep the house as investment longer term, later pay capital gain, loose company benefit

If this helps:
Married, 1 child and one on the way, wife stay at home, my income ~190K, Above 800 credit score for both myself and Wife. Purchased home in the Cleveland area for 400K, 2.75% 15 years 20% down.
I Max my 401K, Deffer 5% of my salary, also own another rental property in phoenix area (purchased for 150K in 2012, been rented since ~1400 rent, mortgage is 15yrs 3.5% still owe ~98K current Zillow estimate is 230K) I manage both rental properties remotely, but have good Handy friends in Phoenix who i pay to go do repairs/maintenance

Your advice is appreciated

Unless you plan to move back into the house(s) sometime relatively soon, sell it ASAP. You can avoid the capital gains and depreciation recapture taxes by either taking a Starker exchange or avoid the capital gains on the first house using a 2 out of 5 year residence rule.  Long-distance rentals are almost always a hassle and not worth the stress and expense. You make too much money to take the best advantages of the rental tax breaks and can't qualify for real-estate investor status for tax purposes with your full-time job (your wife might, but that would require filing an individual tax return for her).

Sell

moumimou said:   house is appreciating
 

there's the rub. you don't know this for sure.  

i would sell immediately. the employer benefit is worth upwards of $20k. The capital gains exclusion is worth more than $28k. The property doesnt really cash flow, so you're just guessing/hoping that the place appreciates by $50k or more.

like vadeltachi said - if you plan to move back in the future, it's a different question. but if you don't, then i would get it on the market immediately.

as for the tenants - you can either list it as tenant-occupied, or pay them something to leave early.

Find a realtor who will charge 6% and ask for a kickback aka rebating agents.  I know some in CA and NV but none in AZ.  I am sure someone will have a referral.

SELL SELL SELL

Luniz97 said:   Find a realtor who will charge 6% and ask for a kickback aka rebating agents.  I know some in CA and NV but none in AZ.  I am sure someone will have a referral.
  
That works for buying, but not for selling. In that case, you just have the agent discount his share of the listing. So instead of 6%, he could take 2% and offer 3% for a buyer's agent. 

henry33 said:   
Luniz97 said:   Find a realtor who will charge 6% and ask for a kickback aka rebating agents.  I know some in CA and NV but none in AZ.  I am sure someone will have a referral.
  
That works for buying, but not for selling. In that case, you just have the agent discount his share of the listing. So instead of 6%, he could take 2% and offer 3% for a buyer's agent. 

  The implication is that the employer will reimburse the full 6%. Then OP can split it something like selling agent will -2%, buyer's agent 2.5% and OP keeps 1.5. 

"....also own another rental property in phoenix ar..."

Surprised nobody mentioned this. Unless OP is considering selling his other property , he's not really saving himself much 'hassle' by unloading this property. He's got one out of state property to deal with, might as well make it 2 and in the same city. And from what I've heard, rental demand is VERY HIGH in this market so it's a good chance this place will be easy money for a few years....

Thank you all for the responses, my thinking back in August was that this property raises my net worth by ~1K$ per month, and it could add yearly tax savings from deductions and depreciation. so i was thinking ~36K in 3 years plus a couple of percent in appreciation and some from tax benefits. I also naively though that basis would be the market value at conversion so i would not owe too much capital gain taxes, now i think purchase cost plus/minus a few things.
I am leaning towards selling, i am checking how the June deadline plays as in i have to list by June? or close by June? (tight timeline) and if company allows listing with tenants in the house or not? once i hear i will talk to the tenants and decide how to deal with them. 

moumimou said:   Thank you all for the responses, my thinking back in August was that this property raises my net worth by ~1K$ per month, and it could add yearly tax savings from deductions and depreciation. so i was thinking ~36K in 3 years plus a couple of percent in appreciation and some from tax benefits. I also naively though that basis would be the market value at conversion so i would not owe too much capital gain taxes, now i think purchase cost plus/minus a few things.
I am leaning towards selling, i am checking how the June deadline plays as in i have to list by June? or close by June? (tight timeline) and if company allows listing with tenants in the house or not? once i hear i will talk to the tenants and decide how to deal with them. 

  
Depreciation is a magical thing.  It get reclaimed when you sell the house. Not worth it IMHO unless you're keeping the property for a very long time.

I would sell in time to get the federal income tax exclusion (resided at least 2 of 5 years). What I do not see mentioned is offer the property for sale to the existing tenant at an attractive price. That is what we did with a rental Mom owned when she died.

Keep it.

Not sure what all the selling advice is for. Dude already owns another rental on 15 yr term. He isnt worried about capitol gains on that. He bought another primary w 20% down and 15 yrs.  You know any rental property that you can cashflow on w a 15 yr mortgage is great! 

JaxFL said:   Keep it.

Not sure what all the selling advice is for. Dude already owns another rental on 15 yr term. He isnt worried about capitol gains on that. He bought another primary w 20% down and 15 yrs.  You know any rental property that you can cashflow on w a 15 yr mortgage is great! 

  
I think it's coming from people that equate "not much cash flow ( i am Ok with that)" with zero or negative cash flow. Since he is ok with it, I would say the same, although I would have to question the financial strategy. Why not take the equity out to buy something with a stronger cash flow?

1700/month rent on a $320k home is in favor of selling. With the bonus of no capital gains and the company is paying your realtor fees you should sell and then buy another rental property that has better returns.

Thanks all again for the great advice. I talked to the company managing the benefits and they want the tenants out of the house before they can get started with the process, also we need to sell and close on the house before June 7th (end of benefits), seems like a very tight timeline, i am currently negotiating if they can start the process while tenants are in the property.

JaxFL said:   Keep it.

Not sure what all the selling advice is for. Dude already owns another rental on 15 yr term. He isnt worried about capitol gains on that. He bought another primary w 20% down and 15 yrs.  You know any rental property that you can cashflow on w a 15 yr mortgage is great! 

Just to give everyone an idea on the cash flow from the 2 AZ properties: 
1. Investment property that was purchased solely as an investment: 15yr loan, mortgage including interest and escrow~900, rent 1400 (approximate monthly payment to principal 560$) 
2. Primary property that was converted to rental:  15yr loan, mortgage including interest and escrow~1550, rent 1700 (approximate monthly payment to principal 950$)

So both properties generate about 600$ cash flow , and about 1500$ to principal monthly

moumimou said:   
JaxFL said:   Keep it.

Not sure what all the selling advice is for. Dude already owns another rental on 15 yr term. He isnt worried about capitol gains on that. He bought another primary w 20% down and 15 yrs.  You know any rental property that you can cashflow on w a 15 yr mortgage is great! 

Just to give everyone an idea on the cash flow from the 2 AZ properties: 
1. Investment property that was purchased solely as an investment: 15yr loan, mortgage including interest and escrow~900, rent 1400 (approximate monthly payment to principal 560$) 
2. Primary property that was converted to rental:  15yr loan, mortgage including interest and escrow~1550, rent 1700 (approximate monthly payment to principal 950$)

So both properties generate about 600$ cash flow , and about 1500$ to principal monthly

OK, so assuming 1%/year for maintenance and oh, let's be optimistic and say 95% occupancy...net rent is about 1350/mo. loan costs appear to be ~600 so you're "making" $750/mo in net worth, although actually losing $200/mo via cash flow.

if you sold WITHOUT the company benefits but perhaps with a 1% rebating realtor (plenty in AZ), you'd net about $170k from the sale, tax-free (less depreciation recapture which we'll say is a wash)

so you're getting effectively 5.3% ROI on the equity you have in that property, and the risk is...at least moderate, given AZ prices from the last decade. i personally think the upside potential is less than the downside potential for a house like that in AZ, but that's me (i have a brother who rode that swell up and then down...n=1 of course)

if you think you can beat that ROI with less risk on another investment, then you should sell. otherwise, keep it. actually, you should probably adjust those numbers to account for the significant tax cost of holding the property, but some assumptions would be required.



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