Seattle, WA · Member since 2018 · 7 posts · 0 votes
Recently moved from LA to Seattle (1 year ago) therefore, I can sell my condo without paying sales taxes (if I do it within the first years), however, I have a wonderful tenant that has been paying my mortgage punctually and the condo is expected to appreciate due to a metrolink rail extension (currently happening) and to the opening of a downtown area along with new Disney studios. Should I sell and invest in the Seattle greater area or keep it and miss out on Seattle’s expanding house market?
In order to avoid capital gains taxes, which can be pretty steep, you have to sell the condo and use the proceeds towards the purchase of a new personal residence within two years. You have to have lived in the home for two consecutive years within the last five years to qualify for this tax exemption, so the clock is already ticking if you have been renting the condo.
This isn't correct.
You're mixing 1031 exchange and 121 primary exclsuions.
In a 1031 you need to sell a rental and re-invest all proceeds in a new rental.
With the 121 exclusion as long as you've occupied and owned the rental 2/5 years you could sell it and exclude all tax.
There is no requirement to buy any thing else.
If he lived in it for 2 years and JUST moved to Seattle, he can rent it for 3 more years.
Rental Property Investor · Issaquah, WA · Member since 2017 · 37 posts · 24 votes
7y
Hi @Jesse Valle,
In order to avoid capital gains taxes, which can be pretty steep, you have to sell the condo and use the proceeds towards the purchase of a new personal residence within two years. You have to have lived in the home for two consecutive years within the last five years to qualify for this tax exemption, so the clock is already ticking if you have been renting the condo.
Consider this, if you decide to keep the condo as a rental, the cash flow and appreciation return would need to exceed the prospective taxes you will eventually have to pay on the capital gains when you do sell, unless you shelter those gains in a qualified investment vehicle like a 1031 exchange upon sale of the property. You also have to compare the anticipated gains of the condo to other investment markets. It may not provide much greater a return than Seattle or Tacoma, for example. It may return less.
If your desire is to increase your capacity to invest in properties while sheltering your tax liability, you may be better served by selling the condo while it qualifies as a personal residence and purchasing another property locally as a house hack. This allows you to qualify for the new property as a personal residence because you are living in the dwelling while also renting part of the property for profit. Additionally, you get to take advantage of lower interest rates on loans and potentially refinance your new property as it appreciates to purchase more real estate to flip, BRRRR, or purchase as turnkey rentals.
Think about how you might best leverage the assets you have while reducing your tax liability as much as possible. Don’t get attached to the condo just because you lived there and already own it, because that may not be the best method to grow your investments. Keep in mind that cash is king and should be acquired at the cheapest rate possible. Right now might be the best time to have the cash proceeds on hand from the sale of your condo to get the best deal on a property in the Seattle area. Prices are dipping a little on more expensive properties, but sub-300k and multi-family properties are still at a premium and competitive.
In the end it all depends on your goals and strategy for investing. If you are not going to expand your investing in real estate, shelter your gains now by selling and buying another home locally. If you want to build your property portfolio, sell the condo and reinvest the proceeds now when you have the most options available for the kind of property to buy next. The alternative is to sit and wait while you hope the appreciation on the condo will someday be enough to refinance and use the cash out on new investments. That’s IF the appreciation happens. But, by then, the property will no longer qualify as a personal residence sale and it will be more expensive to borrow against. At that point, the rent will need to cover the increased mortgage on the property as well, risking negative cash flow. Also, if you want to sell at some point, it will be more complicated to do so without being subject to capital gains taxes because the property will be considered an investment property.
If this condo hadn't been a personal residence for you and you were asking the same question, the answer might be completely different because the tax liability is different. That being said, I might sell for other reasons. My experience is that condos have a ceiling for their appreciation compared to other property types. Also, tenants do not stay forever, so the great tenant you have will eventually leave. Lastly, condo associations, bylaws and HOA dues make the more difficult to maintain as rentals.
This is my opinion and I’d be curious about the opinions of others. Ultimately, I hope it gives you some points to think about as you make your decision.
Seattle, WA · Member since 2018 · 7 posts · 0 votes
7y
Thank you for all your support! This was my first post ever at BiggerPockets, and I’m beyond happy with the responses from you guys.
I do have a personal inclination towards the property because it’s my first property ever, however, the more homework I do on taxes and appreciation the stronger I feel about selling.
I fail to mention that I have a property management company handling my rental for 8% of the income in addition to an HOA monthly fee. Consequently, i believe my cash flow would quickly increase by replacing my condo with a single family home or just by handling the property myself.
Again, thank you so much for your support and recommendations!
Rental Property Investor · Issaquah, WA · Member since 2017 · 37 posts · 24 votes
7y
@Jesse Valle Every situation depends upon the circumstances surrounding it. If you don't have much equity in the property, for example, that can impact your strategy. My assumption was that you have decent equity; enough to consider capital gains will be an issue. If you've been depreciating the property over the past year as an investment, that will increase your gain, but not by much. So, make sure to base your decision on your personal circumstances. If you are comfortable giving more details on a private basis, feel free to pm me and I'll do my best to give insight. I hope you can get the answers you need!
In order to avoid capital gains taxes, which can be pretty steep, you have to sell the condo and use the proceeds towards the purchase of a new personal residence within two years. You have to have lived in the home for two consecutive years within the last five years to qualify for this tax exemption, so the clock is already ticking if you have been renting the condo.
This isn't correct.
You're mixing 1031 exchange and 121 primary exclsuions.
In a 1031 you need to sell a rental and re-invest all proceeds in a new rental.
With the 121 exclusion as long as you've occupied and owned the rental 2/5 years you could sell it and exclude all tax.
There is no requirement to buy any thing else.
If he lived in it for 2 years and JUST moved to Seattle, he can rent it for 3 more years.
Recently moved from LA to Seattle (1 year ago) therefore, I can sell my condo without paying sales taxes (if I do it within the first years), however, I have a wonderful tenant that has been paying my mortgage punctually and the condo is expected to appreciate due to a metrolink rail extension (currently happening) and to the opening of a downtown area along with new Disney studios. Should I sell and invest in the Seattle greater area or keep it and miss out on Seattle’s expanding house market?
Jessee - If you occupied the property 2 years before you moved to Seattle you can rent it for 2 more years and still sell it without paying capital gains.
There is actually a fairly unique strategy that could come into play here and one of the rare times we suggest an S corp for a holding entity for a rental.
Ultimately I'd reach out to a tax pro and have them walk through your specific situation to ensure you're getting correct information and the best options for your scenario.
Rental Property Investor · Issaquah, WA · Member since 2017 · 37 posts · 24 votes
7y
@Jack B. I'm sorry you feel that way and that you feel it necessary to degrade others trying to participate in good faith. Best of luck with your pursuits.
@Jack B. I'm sorry you feel that way and that you feel it necessary to degrade others trying to participate in good faith. Best of luck with your pursuits.
Speaking as if your advice was factual is not practicing in good faith, you're misleading people. If it wasn't for myself and another person here, you would have led this person to make a poor financial decision based on false information. If you are not sure, say I THINK. Not that hard.
Speaking as if your advice was factual is not practicing in good faith, you're misleading people. If it wasn't for myself and another person here, you would have led this person to make a poor financial decision based on false information. If you are not sure, say I THINK. Not that hard.
I agree that using "I think" would have been better in this case if I was unsure of myself, but I gave the best opinion I could based upon my knowledge and even said so in my posting. I stand by my recommendation and I believe it is sound advice because I do not believe I was necessarily incorrect in my premise. I just had the number of years wrong in which Jesse needed to make such a decision for 121 to apply, that's it. Everything else could be considered to make a decision still applies, in my opinion.
I'm happy to be corrected by members of the community and learn with everyone else. I believe that's the purpose of the forums. No one is perfect. But your attitude and approach to others in the forum is not polite and I encourage you to think about that. I wish you the best in your work but please do not reach out to me in the future. I can find better company to keep.
Seattle, WA · Member since 2018 · 7 posts · 0 votes
7y
Thank you all for your time and support!
I purchased the condo back in 2012/2013 as my primary residence with a 20% down payment to avoid the Mortgage Insurance fee. The condo appreciated significantly over the last few years (Approx 46%), and now it seems to be heading down (Approx 34% appreciation).
Needless to say, the monthly HOA fee that pays for the tenant's utilities and the 8% Property Management fee is eating my monthly cash flow... and now that I have an idea of how much taxes I will be paying if I don't sell it within the next 2 years (thanks @Natalie Kolodij and @Mike Chern), I'm definitely looking forward to selling my property this summer. (Thanks for the advise on the property depreciation opportunity @Greg Bishop... I had no idea I could do that, but I will educate myself ASAP through @BiggerPockets .com)
I really appreciate the advise from everybody, and I would like this opportunity to have a follow-up question if possible (I may create another post for this).
I have been reading about BRRRR, and I love the house-hacking idea to reduce costs, the problem is that I live in Seattle but I'd like to move to Bainbridge Island or Poulsbo... however, there are no duplex or multifamily apartments out there! (in my experience)
So, I've been talking to a lot of people from those areas, and apparently "building" is something people do over Bainbridge and Poulsbo (please remember that I come from LA, where "building" is never an option for "normal" people), consequently, I though about building a duplex and taking advantage of house-hacking opportunities. Is this completely unrealistic? do you guys have any recommendations?
Real Estate Broker · Poulsbo, WA · Member since 2018 · 121 posts · 66 votes
7y
@Jesse Valle, I'm in Poulsbo and love it here. Bainbridge is great, too. If you'd like to explore this part of Kitsap (MUCH more affordable than the Seattle side!), let me know. Happy to show you some properties. There are SOME duplexes/small MF, but definitely not as many as on the other side of the Sound. Another option for you may be a smaller SF home with potential for MIL/cottage/tiny home for renting out.
Rental Property Investor · Issaquah, WA · Member since 2017 · 37 posts · 24 votes
7y
@Jesse Valle I would find an agent that understands your goals and can help you find the right fit. There are many types of properties that could work for you. I wish you the best.
Rental Property Investor · Bainbridge Island, WA · Member since 2014 · 10 posts · 9 votes
7y
Jesse - I am a builder/developer on Kitsap County and Bainbridge. Due to high land costs, low rents relative to Seattle, and a lack of MF zoned property you will find it very difficult to build and rent a duplex profitably on Bainbridge Island. My current project there is for condo/townhomes, which should be profitable due to relatively high selling prices vs rents, but if they don't sell and I have to hold them and rent them out they would be breakeven at best. I have built duplexes in Bremerton recently and made them cash flow, however this due to my sweat equity for profit and overhead - if I had to pay a builder they would not cash flow either. I think your best bet is to follow Megan's advice and and look for a smaller home where you can create a MIL/ADU relatively easily.
Speaking as if your advice was factual is not practicing in good faith, you're misleading people. If it wasn't for myself and another person here, you would have led this person to make a poor financial decision based on false information. If you are not sure, say I THINK. Not that hard.
I agree that using "I think" would have been better in this case if I was unsure of myself, but I gave the best opinion I could based upon my knowledge and even said so in my posting. I stand by my recommendation and I believe it is sound advice because I do not believe I was necessarily incorrect in my premise. I just had the number of years wrong in which Jesse needed to make such a decision for 121 to apply, that's it. Everything else could be considered to make a decision still applies, in my opinion.
I'm happy to be corrected by members of the community and learn with everyone else. I believe that's the purpose of the forums. No one is perfect. But your attitude and approach to others in the forum is not polite and I encourage you to think about that. I wish you the best in your work but please do not reach out to me in the future. I can find better company to keep.
Regards.
Right, millionaires like me can also find better company to keep, like people who don't pretend to know what they are talking about and mislead people. But you go ahead and keep spouting false information as if it's fact and being polite. I'll keep being competent and calling out low quality posters like you and giving out factual and accurate information so people can make accurate decisions instead of being misled by novices.
