Advice on sale needed ASAP

14 Replies

Hey all, I need advice regarding the sale of my rental. It is a former residence that is a cookie cutter town house. I am basically breaking even on. I owe $107k on it and market value is $157-160k. 

1. Are transaction costs typically 8% of the sale? That is what I am being told (factoring in commissions and misc. fees). 

2. According to tax law I don't think I need to pay any capital gains as I lived there from 2010-2012. It became a rental in 2013. From my understanding I need to have lived there for 2 of the last 5 years. Is this correct?

3. I don't want to hassle with a 1031 as I am still trying to decide where I want to buy the next properties. Currently considering out of state as an option. That said, I will have to pay depreciation recapture. As I only took depreciation for 2 years of around $4k each year, am I only taxed at 25% of that so a total of only $2k?

4. If my math serves me right, my net in pocket would be: $157k-$12,560 (transaction costs) - $2k (depreciation recapture) - $107k = $35,440. Is this right or am I missing anything?

Thanks,
Raky

If you want to get the exclusion on capital gains for the sale of a residence you need to CLOSE the sale within three years of moving out.  So, if you moved out in 2012, you need to close this year on or before the same day you moved out.

Your 8% number is a reasonable estimate for the commissions and closing costs.  In some areas, seller concessions may still be needed on a sale, so that might eat up another 3%.  And you will have some amount of rehab expenses, if its been used as a rental for the last few years.

The tax on unrecaptured depreciation is based on the amount of depreciation taken or allowed, whichever is greater.  So if you're not taken the deprecation you should have in one or more years you should refile taxes for that year and take it.

Talk to your CPA, but you seem to be correct on 1 and 2.  If your house is going to be an easy sale for an agent, you can tell them that you only want to pay 4-5% instead of typical 6% commission.  Again, everything is negotiable (other than the government)

Why not keep it as a rental?

Regarding question number two about whether or not your transaction will be tax free, see IRS  publication 523:

http://www.irs.gov/publications/p523/ar02.html

Your math is correct.  But as Jon said you need to have less than 3 years have based from moving out to closing.  If it currently has tenants that will be a big complication in closing quickly. If the window is close, you might want to do is listed with a discount brokerage and offer it at 149K.  You may be able to get a quick close with the buyer paying closing costs beyond the agent commission.

If you miss the window, I would wait until the tenant is out and make at least cosmetic repairs and then list it.

Thanks all! 

@Josh Bakhshi  I am selling the house because I am breaking even every month. Sure there is principle paydown of $2500 a year but I think I can use the proceeds to fund 2 more properties that cashflow and don't have an HOA. This house wouldn't have been my top choice as a rental, circumstances just made it one.

Originally posted by @Jesse T. :

Your math is correct.  But as Jon said you need to have less than 3 years have based from moving out to closing.  If it currently has tenants that will be a big complication in closing quickly. If the window is close, you might want to do is listed with a discount brokerage and offer it at 149K.  You may be able to get a quick close with the buyer paying closing costs beyond the agent commission.

If you miss the window, I would wait until the tenant is out and make at least cosmetic repairs and then list it.

@Jesse T. the lease is ending at the end of this month. I moved out in October of 2012. My property manager is also a broker and per the agreement he gets first crack at listing it which I am fine with. Average days on the market for both sales that occurred last month in my community for the same units are $158k in 3 days and $161k in 5 days. It is located near the Galleria area in Houston so quite a bit of demand. 

If you are using an Agent ask them to run a net sheet so you can see your profit AFTER all the fees. This will help you to adjust your price as necessary. 

You should also give your tenant notice via registered mail as soon as possible. Here in CA, if they've live there for over a year, they're entitled to 60 day notice. That can potentially slow down the sale and if you need to sell before the 3 year mark, which you really should, the extra month could make a difference.

Originally posted by @Rob B. :

You should also give your tenant notice via registered mail as soon as possible. Here in CA, if they've live there for over a year, they're entitled to 60 day notice. That can potentially slow down the sale and if you need to sell before the 3 year mark, which you really should, the extra month could make a difference.

 @Rob Buffington it was a short term 3 month lease. The tenant already gave me notice that they are leaving at the end of this month so no issue there. 

Thanks for the quick replies guys, y'all are awesome! Reason it was urgent as it was listed for rent and there are already interested parties (nobody submitted an application yet). It will be listed for sale tomorrow instead. 

Sounds like timing won't be an issue.  But don't push it.  Three years and a day and you lose this exemption.  I have a co-worker who ended moving back into a rental for two years to restart the clock.

My first thought was $160K seems low for the Galleria area. Condos were going for that when I was looking for a home to buy back in 2003. I just did a quick MLS search for 2BR townhomes/condos in the 77057 zip that closed in March and April. There were 49 closings and the average sales price was $295K. Obviously I'm not familiar with the particular circumstances of your property.

And yes, that HOA fee is a killer, and it's the difference between a profitable rental and one that just squeaks by. That's why I always recommend that people avoid condos like the plague.

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