Hold or sell rental property? Better for taxes to sell during retirement?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
kjvmartin
Posts: 1222
Joined: Wed Jan 21, 2015 8:57 am

Hold or sell rental property? Better for taxes to sell during retirement?

Post by kjvmartin » Sun Apr 08, 2018 8:35 pm

Trying to give my mother some good advice. She owns a rental property and is planning to retire in a year.

Her income is in the 15% tax bracket (single no dependents) and will later consist of a small pension/social security. She has a very low cost of living with her primary residence and new car all paid off. She has some retirement savings as well. The rental house is very old (1930s), very small (600sq.ft) and in a very poor area. There is a consistent tenant in there for about the last 10 years with no plans of leaving. The roof is about 30+ years old. Siding, everything is about that old. Furnace and electrical are newer. Strong sellers market right now.

The numbers:

$575/month rent. $6900 annually. Slightly low for the area, but seems to keep the tenant turnover low.
Taxes: $1039. Insurance $640.

While she has been working, after we deduct expenses and taxes her annual profit on the house has been $1200.

The house could sell for $40,000.

Should she sell it? If she decides to sell, should she wait till she's on a smaller retirement income? How would taxes work? The house has been in the family for decades. I normally file her taxes and would wonder how to handle all of that. Thanks
Last edited by kjvmartin on Sun Apr 08, 2018 9:20 pm, edited 1 time in total.

Nate79
Posts: 3323
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Hold or sell rental property? Better for taxes to sell on retirement income?

Post by Nate79 » Sun Apr 08, 2018 9:08 pm

How many years of profit would she lose for one major repair like roof replacement?

Sell.

User avatar
Sandtrap
Posts: 5209
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Hold or sell rental property? Better for taxes to sell on retirement income?

Post by Sandtrap » Sun Apr 08, 2018 9:13 pm

IMHO:
Sell
asap.
The property is a greater liability than an asset.

aloha
j

kjvmartin
Posts: 1222
Joined: Wed Jan 21, 2015 8:57 am

Re: Hold or sell rental property? Better for taxes to sell on retirement income?

Post by kjvmartin » Sun Apr 08, 2018 9:17 pm

Nate79 wrote:
Sun Apr 08, 2018 9:08 pm
How many years of profit would she lose for one major repair like roof replacement?

Sell.
Right. She just re-did the kitchen. It's about an 8x13 room which also houses the washer/dryer. The cabinets, a plumber, and an electrician and I think she's pretty much sunk for the year. She gets most stuff done cheap - side jobs, used appliances, friends of friends. Still, it doesn't take much to eat up the earnings.

Her worry is that the income will be helpful in her retirement years (if she can get things up to date while she's working) and that she is concerned the taxes on the sale would eat too much of the money. - Capital gains?

riverguy
Posts: 414
Joined: Sun May 23, 2010 10:33 pm

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by riverguy » Sun Apr 08, 2018 9:34 pm

How long has she owned it? Depreciation recapture should be factored in.

kjvmartin
Posts: 1222
Joined: Wed Jan 21, 2015 8:57 am

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by kjvmartin » Sun Apr 08, 2018 9:39 pm

riverguy wrote:
Sun Apr 08, 2018 9:34 pm
How long has she owned it? Depreciation recapture should be factored in.
What does this mean? She's owned it at least.. 35 or 40 years. She used to pay an accountant hundreds a year to do taxes. I have used TurboTax for the last 4 years.

riverguy
Posts: 414
Joined: Sun May 23, 2010 10:33 pm

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by riverguy » Sun Apr 08, 2018 10:05 pm

kjvmartin wrote:
Sun Apr 08, 2018 9:39 pm
riverguy wrote:
Sun Apr 08, 2018 9:34 pm
How long has she owned it? Depreciation recapture should be factored in.
What does this mean? She's owned it at least.. 35 or 40 years. She used to pay an accountant hundreds a year to do taxes. I have used TurboTax for the last 4 years.
You have to pay back all of the tax deferred depreciation you were entitled to take. Being that she bought it that long ago, the purchase price was probably so small it doesn’t matter. You will have to pay long term cap gains on most of the sales price I’m sure.

DVMResident
Posts: 1253
Joined: Mon Aug 01, 2011 8:15 pm

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by DVMResident » Mon Apr 09, 2018 12:02 am

Like other posters have said, the deferred/pending maintenance couple with a low-income area makes the downside worse than the upside.

There will very likely be some tax benefit to delaying the sale. The recapture tax will be what it is, but the LTCG portion will benefit in a zero income year. There's a lot of moving pieces and you have TT. Do a dummy return comparing selling this year vs selling next year.

My guess is a $40k sale next year (2019) might be the best tax move. But realize you're taking another year's worth of risks here (e.g. repairs, interest rates, economic cycles, etc.). If she/you can't afford those risks, sell now.

The upside of delaying to next year is your mother can use the sale proceeds to delay pension/SS at least a year (2020), further (1) decompressing taxes across multiple years and (2) effectively converting risky income to super safe income (SS/pension), which provides some valuable stable and valuable cash-flow for a low-income retiree.

Carefreeap
Posts: 2385
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by Carefreeap » Mon Apr 09, 2018 10:01 am

DVMResident wrote:
Mon Apr 09, 2018 12:02 am
Like other posters have said, the deferred/pending maintenance couple with a low-income area makes the downside worse than the upside.

There will very likely be some tax benefit to delaying the sale. The recapture tax will be what it is, but the LTCG portion will benefit in a zero income year. There's a lot of moving pieces and you have TT. Do a dummy return comparing selling this year vs selling next year.

My guess is a $40k sale next year (2019) might be the best tax move. But realize you're taking another year's worth of risks here (e.g. repairs, interest rates, economic cycles, etc.). If she/you can't afford those risks, sell now.

The upside of delaying to next year is your mother can use the sale proceeds to delay pension/SS at least a year (2020), further (1) decompressing taxes across multiple years and (2) effectively converting risky income to super safe income (SS/pension), which provides some valuable stable and valuable cash-flow for a low-income retiree.
+1

You may be surprised that very little of that $40k CG is going to be taxed at all.

Tal-
Posts: 338
Joined: Fri Apr 22, 2016 10:41 pm

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by Tal- » Mon Apr 09, 2018 11:38 am

A few things to consider:

1: Taxes on a rental sale are almost always lower if sold during retirement. This is because the taxes from the sale of a rental property (both deferred income and cap gains) depend on other sources of income (e.g. W2 income).

2: However, she's in a low tax bracket this year (15%), and the sale price will be modest (40K), so I expect or the difference in taxes in 2018 vs 2019 to be modest. It's hard to say just how big the difference would be, but I'd wager a ~2-3K. Normally, you can do a mock-up of taxes with/without the sale, but that may be hard given the new tax law changes.

3: With a modest $1200 positive cashflow/year on that house, I feel strongly that the total expected return is actually negative. For example, if there's a 20% chance that there's a 5K bill to put on a new roof, that's an expected return of $1K (5K * 20%). Do that for all of the possible capital expenses that may be coming, and that $1200 positive cashflow quickly vanishes.

Overall, I feel pretty strongly that she should sell. The more difficult question is whether to sell in 2018 or 2019. If she can stomach a big capital expense hit to the property, such as a $5k new roof, it may be worth the gamble to keep it until 2019. If she's more conservative or doesn't have that type of liquidity, she may want to sell in 2018.
Debt is to personal finance as a knife is to cooking.

kjvmartin
Posts: 1222
Joined: Wed Jan 21, 2015 8:57 am

Re: Hold or sell rental property? Better for taxes to sell during retirement?

Post by kjvmartin » Mon Apr 09, 2018 1:56 pm

Tal- wrote:
Mon Apr 09, 2018 11:38 am
A few things to consider:

1: Taxes on a rental sale are almost always lower if sold during retirement. This is because the taxes from the sale of a rental property (both deferred income and cap gains) depend on other sources of income (e.g. W2 income).

2: However, she's in a low tax bracket this year (15%), and the sale price will be modest (40K), so I expect or the difference in taxes in 2018 vs 2019 to be modest. It's hard to say just how big the difference would be, but I'd wager a ~2-3K. Normally, you can do a mock-up of taxes with/without the sale, but that may be hard given the new tax law changes.

3: With a modest $1200 positive cashflow/year on that house, I feel strongly that the total expected return is actually negative. For example, if there's a 20% chance that there's a 5K bill to put on a new roof, that's an expected return of $1K (5K * 20%). Do that for all of the possible capital expenses that may be coming, and that $1200 positive cashflow quickly vanishes.

Overall, I feel pretty strongly that she should sell. The more difficult question is whether to sell in 2018 or 2019. If she can stomach a big capital expense hit to the property, such as a $5k new roof, it may be worth the gamble to keep it until 2019. If she's more conservative or doesn't have that type of liquidity, she may want to sell in 2018.
Thanks for sharing this. I'm forwarding this post her way and highlighting this response with emphasis. My suggestion has been to sell. She is not elderly, but in her early 60s and also working on estate planning. I have heard some of the frustration that comes along with owning the property and feel it would be best overall for her to unload it, especially while the market is good.

Post Reply