Hello everyone! I would like some opinions or advice. Here is me and my wife's situation
We bought our townhouse for a little over 60k and closed in September of 2016 (and this is our residence) our HOA is $125 a month(covers water). We have been remodeling it with our own cash and it should be complete in the next couple of months. From what I've researched most townhouses in my area are selling for about $100 sq ft. Putting us around 100k if we sold. We originally had plans to rent it out after the remodel and move out into a apartment until we are able to finance a second property. but now I'm wondering if we should sell after the remodel and take half of the proceeds and re invest in either a fix n flip, or buy a duplex to house hack, or buy a single family to rent. The last thing we have been debating is if we should wait one more year to sell or rent it out just to avoid the taxes. Now If we wait one more year to sell it's going to take us at least 8 to 12 months to save up enough cash to buy a second property. Now if we sell now i believe it will jump start our investing sooner because we will have the capital to make some moves. Our long term goals are to have a lot of rentals with some fix and flips in between. So my question is should we sell now or wait one more year and sell. or should we hold and rent it out after one year? Rents in my complex go for about $850. Thanks in advance!
Two things to consider: (1) 1031 like-for-like exchange it, so sell it and put the proceeds in to your next investment property. This is one of the greatest tax benefits of real estate investing as it avoids capital gains taxes. There are some rules to know so do your research, talk to your CPA, etc. (2) pull out equity through a refinance. You say you want capital for your next deal, well you have it, it's sitting in your newly renovated townhouse. This way you can keep the townhouse as a rental AND buy another property.
I think the first step on whether or not to wait the year to avoid the taxes is to calculate what the taxes would be if you sold now.
How much did you spend on renovations?
The gain would be
Selling price - selling costs(commissions etc) - purchase price - closing costs for purchase - remodelcosts = gain
Federal capital gains tax rate is either 0%, 15% or 20%.
Arizona state income tax rates range from 2.59% to 4.54%
The tax would be approximately $7,816 if I took 15% fed capital gain tax rate and the highest Arizona state income tax rate and assumed the gain to be $40,000. This calculation also assumes that personal exemption and itemized/standard deduction weren't used to further decrease the income.
It appears the gain will be a lot lower resulting in a lower tax.
My thought is that simply selling and paying the tax because you want to move fast is short sighted. If you're gain is $30K and you sell now and pay tax that's $6K in tax that goes out the door immediately.
If you wait you'll lose rental income for that 8-10 months. But how much is that $3-$4K net roi???
You gotta do those calculations. Otherwise you make a lot of dust and do a lot of work but benefit less then if you just sat tight and let the calendar make $6K for you.
I agree with @Dave Foster about selling prior to Sept of '18 as being short-sighted, especially if we were talking about a larger gain.
I don't think $30-40k in cap gains will matter much to you tax bill, depending on your w-2 income.
Over the last couple years I have been amazed at how little taxes are a factor when I report $70k in gains/yr or less. That's my target and will be more than your gain, but I have 2 kids and reportable income so low I could practically qualify for free school lunches. Your mileage may vary.
For the PITA of moving factor on this, I'd stay. If you were in a $300k house where the payments were killing you, I may say differently. Can you really rent for less than the $850/mo you will receive for this condo @Cisco Hood ? No way I'm moving and becoming a renter again to save small dollars.
If your HOA is good, I would probably put a heloc on it this someday and keep as a rental when I bought again. Good luck!
The rent to value is too low to make the property a viable income investment. I would sell and move on to your next investment sooner rather than later.
Best option would be house hacking a multi.
Okay I appreciate the comments this is exactly what I was looking for, some different angles to look at what we could or should do.
So some quick numbers:
-Reno cost $8200 (i did most of the labor)
-combined income 50k (w2 married 2 kids)
-sell price est. 100k (comps between 100-115k) and 100k is me being generous because most of the comps are not renovated.
-selling cost est. 10k
-purchase closing cost 5k
So if we stay I would want to live here for the 2 years then rent it out. I like the idea of pulling cash out from the equity to use on the next property. Ultimately at the moment I'm still torn on selling now and getting into possible a better deal like a house hack or something with no HOA.
Question: we pay a combined mortgage + HOA of $600 if we rent it at $850 Is that considered a good deal for us cash flow wise or no?
Yearly taxes are $617
Doing a 1031 was mentioned, but isn't applicable because this is your residence at the moment.
If you paid $60K+$8200 improvements + purchase closing of $5K your basis is $73.2K. Sell for $100K less $10K in closing less basis gives you a gain of $16,800. That will be taxable as long term capital gains - 15% (plus state, if applicable).
Keep in mind the tax bill, which passed the house, changes the 2 of 5 to 5 of 8, so you would need to stay 3.5 more years if that change become law. I think it might.
You're probably slightly cash flow negative with those number. You'll pocket a bit each month, but when you have an expense or vacancy it will eat that up.
@jon holdman okay so 16k is what is taxable. Me not understanding the numbers I thought the 30k was being taxed. 30k being the estimated check we would get after the sale. That being said the taxes on 16k will be small and we could sell now take the est. 25k and funnel that into a better deal. And the 2 of 5 to 5 of 8 means we likely would have to stay 3 plus more years and that's not going to work for our future plans. Thanks for the reply
I can't say this enough thanks for the replys. I hope to be as insightful as you guys one day so I can help out too.
You will have negative cash flow on that property especially considering the opportunity value of your equity.
@thomas s So would you sell? And if so what what you do with the 25k from the sale?
Okay so if you guys were in the early stages like myself and had 25k from a sale what would you do with that money?
One more factor on calculating your basis is what did you spend the money on. Its possible much of what you spent fixing the place up does not add to your basis. If you bought a rental then pretty much everything you spend either adds to your basis (everything you spend making it rent ready, capital items after its ready) or is immediately deductible (expense items after its ready.) But for a residence, its only capital items. A new roof or furnace, for example. Maintenance items, like paint, don't add to your basis. Basically if you're just fixing what's there, it doesn't change your basis. Only "improvements" add to your basis.
The check you get when you close has only a loose relationship with the taxable gain. The check you get at closing is heavily affected by the loan pay off. The loan, OTOH, has no effect on the taxable gain.
I would advise you to sit with an accountant or financial planner and go through the number in detail, with consideration of your other income, and discuss future goals.
@Jon Holdman Okay I see. Yeah we do need to find a good cpa that's next.
Can't you roll your IRA over to a Self-Directed IRA, take money out of there in the amount of your renovation budget, and then be allowed to deposit 100% of the profit of that property sale into that IRA, to be used for your next investment, tax-free/tax-deferred?
Any profit you make off the money from your IRA should be untaxable, as long as it's used for further investment. There may be some details, but this is why these tax-shield SDIRA's were created.