When should I sell

10 Replies

I just purchased my first home this past July. It's a 2 unit house that I'm currently using as my primary residence, and renting the second unit. I had to take a FHA 3.5% down loan so my mortgage is high. I created a separate bank account for the house expenses and incoming rent. I charge myself the rent I would have to pay if I rented the same apartment elsewhere, by depositing that money into the "house" account. With the rent from my tenants and the rent I charge myself I have a positive cash flow of $200 into the "house" account. Now I notice that other identical houses are being sold for $100k more than what I bought my house for. My question is should I sell it or hold it for the cash flow, and if I do sell it what kind of taxes will I have to pay on the gains. When are my gains tax free, after 2 years or 5 years as my primary residence

The unit/half you live in would be treated as your primary residence, and eligible for the 121 exclusion tax exemption, after 2 years.  The other half will be treated as an investment property for cap gains.  Never thought about it, but I assume you depreciate the other half, and have depreciation recapture like any other investment property.

@Steven Hamilton II ??

Originally posted by @Ramesh Ramdatt :

I just purchased my first home this past July. It's a 2 unit house that I'm currently using as my primary residence, and renting the second unit. I had to take a FHA 3.5% down loan so my mortgage is high. I created a separate bank account for the house expenses and incoming rent. I charge myself the rent I would have to pay if I rented the same apartment elsewhere, by depositing that money into the "house" account. With the rent from my tenants and the rent I charge myself I have a positive cash flow of $200 into the "house" account. Now I notice that other identical houses are being sold for $100k more than what I bought my house for. My question is should I sell it or hold it for the cash flow, and if I do sell it what kind of taxes will I have to pay on the gains. When are my gains tax free, after 2 years or 5 years as my primary residence

 Your gain will be allocated by the % of rental and percentage to primary residence. You should not be reporting your share of "rent" You simply just add enough to cover the cost of the mortgage, etc.

You will be subject to capital gain rates on your personal percentage AND the rental portion. 

1. Don't sell at least until you get the tax break. 

2. If the property cashflows then I'd say don't sell it at all even if you move. 

3. The questions above from @Mark Holencik was very important because opportunity costs, efficient use of capital, etc. 

In general my recommendation for folks who don't have all their liabilities covered by passive income is that they shouldn't ever sell a cash flow generating property. 

@Ramesh Ramdatt , Excellent discipline on your part.  You are experiencing exactly what an investor would expect when buying a mixed Primary residence/investment property. You are supplementing with your own funds because you are living in and not renting the other side. Because you keep good records and are disciplined with your house account you can see very quickly your real return and the opportunity cost for remaining there.

If you sell you will not get 100K.  Your sale will have costs, commissions and very likely tax on 50% of the profit unless you do a 1031 and wait for the 2 year period. So make an assumption that you will net out maybe 70K after the dust settles if you sell now. Your opportunity cost is that 70K.  Your cash flow return is around 3.4% not counting further appreciation.  There's a lot of dividend stocks that wish they did as well.  

And you've got the added possibilities of a future completely tax free/tax deferred sale using the primary residence exclusion coupled with a 1031 exchange.  

Another way to think about it is to do a cash on cash - How much was that 3.5% down payment and what is $2400 as a rate of return on what you paid?  Even with a crappy mortgage you're doing very well (if both sides are rented). 

Patience will be your friend.

Hi Ramesh,

I am a stock market investor, and the question of when to sell a stock investment comes up all the time too.  In general, when I buy shares of a quality company, I aim to hold the investment for a minimum of 3-5 years.  Ideally I would hold a great company that is doing well for a lifetime, with plans leave it as part of my estate.

You are having great success with this property!  Congratulations!

Unless you are very concerned that property values are going to collapse, I'd hang on to this investment.  Investors are all about the long term view.  When you move your money around too much, the transaction costs will drag on you, especially in real estate.

It appears that this property will be a workhorse for you!  If there are no concerns about the property losing value or neighborhood turning, or maintenance issues, and assuming that the property is performing well, I would hold.

Maybe you will find something you like better *as an investment* and that will perform better and reduce your risk.  That's when you could trade up, carefully.   I am not hearing about any red flags with this property that are making it a poor investment, so why change it up? 

As for your primary residence, is the place working for you?  I understand wanting to improve your primary residence.  But you've only been in this place a short while.  I would suggest asking the BP people here who have house hacked how they eventually worked their way up into a better personal residence.  Make a plan for how you will get there. Perhaps you can look around for a distressed property to fix up, I think that's what Brandon Turner did. 

Take your time, and best of luck!