Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

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bnes
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Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by bnes » Wed May 02, 2018 5:35 pm

I'm seeking some ways to think about a sell vs. hold decision.
It is a house in a presently-hot technology city in California.
  • Would sell for $1.2M give or take.
  • Original basis is $36k. Received a 50% step up a year ago based on a $1M appraisal (so $536k basis).
  • The owner is my Mother's living trust: she moved to a nursing home.
  • It is rented in two halves, the front unit for $4400/month, smaller rear unit for $800/month (but that could rise to $1500 if re-rented).
  • Property is assessed at $68k due to Proposition 13. Property taxes are about $4,100/year (If sold taxes would go up about $13.5k per year (1.2% of the rise in assessment)).
  • The low tax rate, surprisingly, is inheritable if the right forms are filed out. This is bad for local governments, good for those of us in the landed class.
  • The home is pretty worn out, and has some major systems that need complete replacement, and there is abatement needed. $40k or more in work needed over next decade.
  • The owner has not used any lifetime exemption.
  • The home is in a stable low crime, low homeless, walk-able, bike friendly, restaurant laden area.
  • The house has a few solar panels, offsetting utility costs.
  • The house is near a major earthquake fault, and while it is reinforced, extensive cracking, broken windows, etc could happen. Quake insurance from https://www.earthquakeauthority.com/ has a high deductible.
  • Managing the house as a rental takes time, which has to be accounted for.
Selling now would incur a capital gain. Selling at the passing of the owner would result in no taxable gain, but a loss of the favorable tax status. The home is not of present interest to any of the siblings, but that could change with kids in the future. The local real estate market is still hot, but who knows in a few years?

HEDGEFUNDIE
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by HEDGEFUNDIE » Wed May 02, 2018 8:06 pm

BHs look down on market timing.

If you need the money, sell. If you don’t, don’t.

gardener7
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by gardener7 » Wed May 02, 2018 8:10 pm

It seems like the $1.2 is giving off 5%-6% - Before expenses, headache and taxes.

I think this is as much of a lifestyle question as a math one. Do you want to be a land lord?

Dottie57
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by Dottie57 » Wed May 02, 2018 8:33 pm

For myself, since I don’t want to be a landlord,I would sell. Will she need the income for the nursing home?

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Watty
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by Watty » Wed May 02, 2018 9:22 pm

bnes wrote:
Wed May 02, 2018 5:35 pm
Selling now would incur a capital gain. Selling at the passing of the owner would result in no taxable gain,
It would be good to put some firm numbers on that.

With her being in a nursing home she may have a lot of deductible expenses so be sure to factor that in the tax calculations. One thing that you did not mentioned is if there are plenty of other assets to pay for her care so that could also be a reason to sell it if she needs the money.

If $100K(or whatever) in taxes could be saved that sounds like a lot but you described the house as being "home is pretty worn out" so it could require spending more that you think to keep if usable and with even a mild dip in the housing markets it could give up a couple of years gains which could be hundreds of thousands of dollars.

One thing to keep in mind too is that in a slow housing market not only can prices decline but it can take a long time to sell a "pretty worn out" house without dropping the price to a distressed level.

In some areas it is not uncommon for houses to also be sold without an inspection contingency. If you wait to sell it until the market cools off then you could be facing having to go through a detailed home inspection on a "pretty worn out" house.
bnes wrote:
Wed May 02, 2018 5:35 pm
I'm seeking some ways to think about a sell vs. hold decision.
One problem you have is that even if you wanted to sell the house it would be hard to sell it when it is rented. If the leases on the rentals has a long time left when you want to settle her estate or if you decide to sell it that could delay being actually able to sell it.

If the front and back rental leases don't end at the same time it would be good to at least get them on the same schedule.
bnes wrote:
Wed May 02, 2018 5:35 pm
The home is not of present interest to any of the siblings, but that could change with kids in the future.
It doesn't sound like when she passes that any of the siblings are going to want to buy out the other siblings share of the house and even if some of them wanted to they might not have enough funds to buy out the other siblings.

It really sounds like keeping the house for the long term is not in the cards so the question is only "when" not "if" it should be sold.

DugiOtok
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by DugiOtok » Thu May 03, 2018 12:41 am

>>Selling now would incur a capital gain<<
In CA it is worst than that. Your mom will have to pay CA State income tax of 10 to 12 % of the gain in addition to Fed capital gain. Thanks to the new tax reform CA income tax and property tax is now only deductible to $10K total. Cost to sell might reach $200K.

bnes
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by bnes » Sat May 05, 2018 12:40 am

OP here: there is no cash crunch. With or without the income stream from the house, there's enough to pay for the elder care.
The way I see it, it's not a great investment, it's not a terrible investment (to keep it). There's risk. Depending on appreciation would be dumb. Having the house might allow grandkids to stay in the area (otherwise prices are way too high).

Current lease is 1 year.

BH's may look down on market timing (when to sell), but generally don't look down on tax efficiency (timing relative to death for step up in gains). Now step up in gains is a political matter... I guess there's a risk that provision will go away in the next few years.

DavidW
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by DavidW » Sat May 05, 2018 1:39 am

You probably know this already but if the child or grandchild inherit the home, the original tax basis carries over. So, property tax carries over at the current level. However, that only applies to the first home.


http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm

I was going to say that the Bay Area has maintained good real estate value over the decades. It is not only the tech sector that is driving up the price but also overseas money (mainly China). Most of these buyers are paying all cash also....

bnes
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Re: Sell vs. Hold Decision on Highly Appreciated House in Tech Zone

Post by bnes » Sun May 06, 2018 11:22 pm

As far as I can tell, the house investment seems on part with a "sell and invest" strategy. Both have risks. The quake risk for example is quite real I suppose, but also if there's a quake that might raise the value of the remaining less damaged homes.

Would you buy this house as an investment, if you could get the favorable property tax rate?

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