Sell real estate, pay capital gains tax and buy index fund?

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Topic Author
shcnno
Posts: 78
Joined: Tue May 09, 2017 10:56 am

Sell real estate, pay capital gains tax and buy index fund?

Post by shcnno »

I'm struggling to see clearly what's best in this situation. I current own an investment property worth 400K with a 200K mortgage. If I were to sell it I will have to pay CG taxes and will end up with about 150K cash that I could put into index funds.

Now if I keep the apartment I can defer the CG tax, while the expected return is probably less than a global index funds, but off course it's hard to know.
I will not incur any CG taxes on stocks, as I live in a tax free country now.

I've tried to calculate both scenarios, but it all depends on the expected return of real estate vs stock markets.
ny_rn
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by ny_rn »

Does this apartment have positive cash flow monthly? Do you want to get out of real estate?
Topic Author
shcnno
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Joined: Tue May 09, 2017 10:56 am

Re: Sell real estate, pay capital gains tax and buy index fund?

Post by shcnno »

Yes it's rented out with positive cash flow after expenses and taxes. Not much hassle with it, just thinking about long term returns vs stock marked.
glorat
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by glorat »

I had a similar situation to make... Properly was earning about 4%. More than bonds, less than stocks. But if one is concerned about returns one must think of risk adjusted returns. The rental income and house price is relatively stable so I'm sticking with it (even though I have no CGT now but would when tax rules change next year on me). It helps being diverse from stocks too.

Your own situation will vary of course
niceguy7376
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by niceguy7376 »

Are you factoring the capturing of depreciation of the rental property
andrew99999
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by andrew99999 »

shcnno wrote: Mon Jul 22, 2019 4:47 pm while the expected return is probably less than a global index funds
I would be surprised if the return of a property leveraged to double would really have a lower expected return than an unleveraged global stock index fund fund.
Last edited by andrew99999 on Mon Jul 22, 2019 9:44 pm, edited 1 time in total.
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Sandtrap
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by Sandtrap »

shcnno wrote: Mon Jul 22, 2019 4:47 pm I'm struggling to see clearly what's best in this situation. I current own an investment property worth 400K with a 200K mortgage. If I were to sell it I will have to pay CG taxes and will end up with about 150K cash that I could put into index funds.

Now if I keep the apartment I can defer the CG tax, while the expected return is probably less than a global index funds, but off course it's hard to know.
I will not incur any CG taxes on stocks, as I live in a tax free country now.

I've tried to calculate both scenarios, but it all depends on the expected return of real estate vs stock markets.
1. The key issue is if you "want" to continue to own the property and all that it entails or not. Regardless of whether it makes a little more or a little less than and index fund. (forget the numbers, do you want "out"?)

If you sell and shift to index funds and the market falls, then you will kick yourself.
If the R/E market tanks and property values and rents fall, then you will kick yourself for not getting out.

2. The only way you're not going to pay capital gains is to 1031 to another property of equal or greater value. But. . . see #1.
** However, if the property was your primary residence within the IRS guidelines, you may be eligible for the exemption.

3. If this is purely a financial decision as far as ROI, then your overall financial situation and long term strategy is important and you haven't provided enough data to know that.

4. Realize that your R/E income property is a "business" and portfolio funds are "investments". Like comparing shovels and carrots. This is why you must decide on your long term financial strategy.

5. There's too many unknowns in your post for anyone to ascertain whether the rental property is viable or not, except to guess or make assumptions. Location, Area of high appreciative value, rental history, income, expenses, Net CAP Rate, expected large maintenance expenditures, HOA, condo or townhouse or SFH, etc, etc.

j
Last edited by Sandtrap on Sat Jul 27, 2019 9:10 am, edited 1 time in total.
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Topic Author
shcnno
Posts: 78
Joined: Tue May 09, 2017 10:56 am

Re: Sell real estate, pay capital gains tax and buy index fund?

Post by shcnno »

glorat wrote: Mon Jul 22, 2019 7:44 pm I had a similar situation to make... Properly was earning about 4%. More than bonds, less than stocks. But if one is concerned about returns one must think of risk adjusted returns. The rental income and house price is relatively stable so I'm sticking with it (even though I have no CGT now but would when tax rules change next year on me). It helps being diverse from stocks too.

Your own situation will vary of course
I'm thinking that property has higher risks than global stocks, as it's a very specific market.
niceguy7376 wrote: Mon Jul 22, 2019 8:00 pm Are you factoring the capturing of depreciation of the rental property
No, have not calculated that. I have added a yearly average for maintenance, however this property is a small apartment and doesn't require too much maintenance.
andrew99999 wrote: Mon Jul 22, 2019 8:04 pm
shcnno wrote: Mon Jul 22, 2019 4:47 pm while the expected return is probably less than a global index funds
I would be surprised if the return of a property leveraged to double would really have a lower expected return than an unleveraged global stock index fund fund.
The thing is the CGT that will take a big bite from the returns of the property, while I won't have any CGT on global stocks. Also the property taxes and rental tax is high. From my calculations the property rises quicker in the beginning while stocks will rise quicker a few years later, due to the higher return. But it all depends of course on the % of expected returns I use for the calculations. I've used 3% for property and 7% for stocks (not accounting for inflation).
Sandtrap wrote: Mon Jul 22, 2019 8:57 pm
shcnno wrote: Mon Jul 22, 2019 4:47 pm I'm struggling to see clearly what's best in this situation. I current own an investment property worth 400K with a 200K mortgage. If I were to sell it I will have to pay CG taxes and will end up with about 150K cash that I could put into index funds.

Now if I keep the apartment I can defer the CG tax, while the expected return is probably less than a global index funds, but off course it's hard to know.
I will not incur any CG taxes on stocks, as I live in a tax free country now.

I've tried to calculate both scenarios, but it all depends on the expected return of real estate vs stock markets.
1. The key issue is if you "want" to continue to own the property and all that it entails or not. Regardless of whether it makes a little more or a little less than and index fund. (forget the numbers, do you want "out"?)

If you sell and shift to index funds and the market falls, then you will kick yourself.
If the R/E market tanks and property values and rents fall, then you will kick yourself for not getting out.

2. The only way you're not going to pay capital gains is to 1031 to another property of equal or greater value. But. . . see #1.

3. If this is purely a financial decision as far as ROI, then your overall financial situation and long term strategy is important and you haven't provided enough data to know that.

4. Realize that your R/E income property is a "business" and portfolio funds are "investments". Like comparing shovels and carrots. This is why you must decide on your long term financial strategy.

5. There's too many unknowns in your post for anyone to ascertain whether the rental property is viable or not, except to guess or make assumptions. Location, Area of high appreciative value, rental history, income, expenses, Net CAP Rate, expected large maintenance expenditures, HOA, condo or townhouse or SFH, etc, etc.

j
Currently there is very little trouble or work with owning this property, so it's mainly that I have to pay taxes and fill out tax returns etc, but I'm ok with this. I might feel differently if there would be more trouble with tenants etc, however I've been lucky and have also rented out at a low price to attract good and stable tenants.
In my situation I will pay CGT either way if I sell this property.

Besides this property I have about 350K in index funds, and own another property that I don't rent out.
The rental property has doubled in value since I bought it 8 years ago and is in a HCOL area.
danielbird193
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by danielbird193 »

shcnno wrote: Tue Jul 23, 2019 3:02 am The rental property has doubled in value since I bought it 8 years ago and is in a HCOL area.
Doubling in value in eight years implies a CAGR of around 9% (nominal), plus whatever rental income you've made over the period. S&P 500 has done about 10.6% over the same period, or 12.8% with dividends reinvested (June 2011 - June 2019). All things being equal, I imagine that means the investments have worked out pretty much the same, give or take a few basis points.

Do you think the house can double again in the next 8 years? Can the S&P 500 do the same? Truth is no one knows, but there is significantly more concentration risk and significantly lower liquidity with the rental. I would take the tax hit and stick it in an index fund for peace of mind.
runner540
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by runner540 »

shcnno wrote: Mon Jul 22, 2019 4:47 pm I'm struggling to see clearly what's best in this situation. I current own an investment property worth 400K with a 200K mortgage. If I were to sell it I will have to pay CG taxes and will end up with about 150K cash that I could put into index funds.

Now if I keep the apartment I can defer the CG tax, while the expected return is probably less than a global index funds, but off course it's hard to know.
I will not incur any CG taxes on stocks, as I live in a tax free country now.

I've tried to calculate both scenarios, but it all depends on the expected return of real estate vs stock markets.
Are you not a US citizen? For US citizens (and perm residents?) there is no such thing as a tax free country.
Topic Author
shcnno
Posts: 78
Joined: Tue May 09, 2017 10:56 am

Re: Sell real estate, pay capital gains tax and buy index fund?

Post by shcnno »

runner540 wrote: Tue Jul 23, 2019 6:41 am Are you not a US citizen? For US citizens (and perm residents?) there is no such thing as a tax free country.
No, I'm not. This is the non US forum :)
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Sandtrap
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Re: Sell real estate, pay capital gains tax and buy index fund?

Post by Sandtrap »

Capital gains tax should not be the primary motive for selling or not selling income property.

Sounds like you have a keeper if the ROI is as you say. Then, the only decision left is, "do you want to own it or not" and it is not a purely financial decision.

Not all financial decisions have to be based on a spreadsheet.

j
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