Ready to Sell Investment Property - Considerations?

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Marcus2848
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Joined: Wed Aug 07, 2019 3:40 pm

Ready to Sell Investment Property - Considerations?

Post by Marcus2848 » Mon Aug 12, 2019 9:48 pm

We have an investment property in a desirable area that's proven too costly to maintain and prone to vacant periods. We've decided to sell it when the current lease expires next summer and re-invest in a better area/unit. However, we may also face a major life change at that time (moving back to expensive area in US, not by choice) and are pricing out scenarios that would result in paying capital gains. I know you're going to tell me to reject those scenarios, but for the sake of thoroughness, what should we be calculating? Capital gains, commissions, fees, depreciation, tax loss harvesting, etc.?

US:
HHI of $225,000
Net worth: $1.2 million, $700k in investments, $250k in real estate (investment properties), and $250,000 in private/savings.
Housing is paid for overseas.

Property:
Paid: $150,000 in 2002
Anticipated Sales Price: $250,000, would require $15- 25,000 in repairs to get to market
We've put about $25,000 in repairs into it since 2002.

If moved back, we expect to spend about $800k - $1 million on a home that meets school/commute/resale criteria.

Thank you for any advice.

StealthRabbit
Posts: 308
Joined: Sat Jun 13, 2009 1:25 am

Re: Ready to Sell Investment Property - Considerations?

Post by StealthRabbit » Tue Aug 13, 2019 12:09 am

If you are truly going to invest in another income property... You would usually coordinate the sale with a 1031 "Like-kind-exchange' to defer any Capital gains. (This requires a 3rd party to do the actual exchange... handle the funds without you touching them) My last 1031 cost me $500, but deferred 10s of thousands in taxes. I reconcile on low income years.
There are rules that apply to 1031s (specific exchange period and designating replacement property (ies))
https://www.investopedia.com/financial- ... anges.aspx

And yes, you will need to know / keep records of complete financials and tax implications regardless of 1031 or not. (For future reconciliation)
As well as run projected tax implications of any and all scenarios.

Cost basis
Depreciation (Must be recaptured if you claimed it or not)
Improvements
Costs associated with transaction (Commissions, advertising, and fix-up expenses incurred within the allotted time period)

BTW... run the numbers on renting vs buying in HCOL area.
Sometimes is best to keep your RE dollars in WORKING properties (10%+ cap rates)
You can rent anywhere in the world if you cash flows are adequate.

Personal Home ownership is not usually a very good quality financial investment. (Your money may be of more value elsewhere and you could end up with significant capital risk and high payments if you buy at the wrong time.) BTDT

New tax rules do not favor High value personal residences (SALT cap)
Last edited by StealthRabbit on Tue Aug 13, 2019 12:28 am, edited 1 time in total.

rascott
Posts: 491
Joined: Wed Apr 15, 2015 10:53 am

Re: Ready to Sell Investment Property - Considerations?

Post by rascott » Tue Aug 13, 2019 12:18 am

I missing the actual question. If selling the home is the proper decision than everything else is kind of baked into the cake. Taxes, etc are going to be what they are.

The only alternative option is a 1031 exchange if you can find another investment property you like. Ideally would be something around the same value or more. But there are tight rules on these and you have a limited time frame to make it happen...not always easy to do. But you'd get to roll your long-term CG over tax free.

If you are done with rental property, then try to max the sale, pay some taxes and call it a win.

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Watty
Posts: 16864
Joined: Wed Oct 10, 2007 3:55 pm

Re: Ready to Sell Investment Property - Considerations?

Post by Watty » Tue Aug 13, 2019 1:28 am

Marcus2848 wrote:
Mon Aug 12, 2019 9:48 pm
We have an investment property in a desirable area that's proven too costly to maintain and prone to vacant periods. We've decided to sell it when the current lease expires next summer and re-invest in a better area/unit.

Net worth: $1.2 million,

If moved back, we expect to spend about $800k - $1 million on a home that meets school/commute/resale criteria.

If you buy a home to live in and another rental property to replace this one then you would have around 100% of you net worth in residential real estate. Just for diversification buying two properties could be a problem since with your primary residence you will already have a lot of exposure to real estate.

With the problems you have had with this property it would be good to consider not getting another rental property.

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Sandtrap
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Location: Hawaii No Ka Oi , N. Arizona

Re: Ready to Sell Investment Property - Considerations?

Post by Sandtrap » Tue Aug 13, 2019 8:16 am

Welcome: :D

Considerations:

1. "Regardless" of financial reasons, do you want to be a landlord? Do you enjoy it?

2. Depending on #1, sell the rental property, pay the taxes, move on. It is not a substantial amount given your asset totals.

3. If #1 & #2, you can always decide at some later date when all is settled if you want to be involved in income property and tenants.

4. Purchasing a home in your new area. Cash for total? or Mortgage?

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

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