Capital Gains Strategy for investment property for future primary

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Capital Gains Strategy for investment property for future primary

Brad M.
Boston, MA · Member since 2017 · 10 posts · 2 votes

I have a lot to go through so I'll get going with the facts

1) I own two residences, 1 investment and 1 primary.

2) Investment:

  • Purchase Date: 6/2013
  • Purchased as primary, converted to rental 9/2016
  • Purchase Price: 370K
  • P&I, Est. Maintenace, Condo fee, taxes and Insurance: $2,030/month
  • Rent: $2,750/Month
  • Market Value: 590K
  • Mortgage Balance: 300K

3) Primary:

  • Purchase Date: 8/2016
  • Purchase Price: 535K
  • Market Value: 580K
  • Mortgage Balance: 425K

4) Other:

  • $175K in liquid assets

We live in a very expensive market here in Boston. We want to move to a suburb with great schools for our 15-month-old and the other on the way but don't need to move until they are ready to start school in 4-5 years. To get a livable home with enough space in towns like this, it will run us around an 800K purchase price. I don't have expensive taste, that's just what it costs around here. In towns like Brookline and Winchester 800K isn't even enough to buy anything.  According to the 2/5 year rule for the capital gain exclusion, we have until 8/2019 to sell the investment property without having to pay capital gains. After 8/2019 we would owe capital gains which if we owed this today it would be a tax bill of 63K. We have been trying to think of ways to come up with the funds without having to sell the investment and below are all the options I can think of with some questions if anyone can help...

  1. Sell everything including the investment before 8/2019 and invest in liquid assets until we are ready to purchase
  2. Use a 1031 exchange to be converted into a multi-family where we would live in one of the units and rent the other(s) if this is possible? 
  3. Pay off the investment mortgage to increase cash flow in order for my family to afford rent while using the other assets/cash to invest in other properties. Financially this makes a lot of sense BUT the major problem is we don't want to move for a long time and being a renter doesn't guarantee anything. Anyone ever worked with a long-term lease before? 5 years for example?
  4. Use a HELOC from the investment property to help with the DP

These are just a few options but I think you get the idea. We want the future primary home to ideally have a mortgage of less than 400K. Any ideas or insights would be greatly appreciated and please don't hesitate to ask any questions!!! Please keep in mind no option can have a sale contingency. In the Boston Metro market, you won't get an accepted offer with any contingencies. 

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  • Charlie MacPherson
    China, ME · Member since 2014 · 3k+ posts · 4k+ votes
    8y

    @Brad M.  One suggestion.  Look to the South Shore.

    For $800K, you can buy a really nice home in a high-end town like Hingham, Cohasset or Scituate.  Come even further south to Plymouth and I can get you into one with an ocean view for that price.

    The South Shore has robust commuter rail service if you're working in Boston or just want to go in to catch the Symphony or a meal in the North End.

    The bottom line is that you'll get a LOT more for your money on the South Shore.

    0Reply
  • Brad M.
    OP
    Boston, MA · Member since 2017 · 10 posts · 2 votes
    8y

    Thank you Charlie for taking the time. I guess I should have mentioned this though. Without getting too personal, our parents are north shore people and we want to be closer to them. I also work in the Seaport and for us, living in a place farther away, like Acton for example, doesn’t work as I wouldn’t get home until 7:30ish every night. We are looking at towns inside of 95 first and if we have to go outside the loop, we would need to be metro west, Wayland, Lincoln, Concord, etc... 

    If we sell everything I know we won’t have an issue but just trying to figure out options that include keeping the investment. 

    Thanks!

    0Reply
  • DJ Richmond
    Real Estate Agent · Quincy, MA · Member since 2015 · 144 posts · 65 votes
    8y

    Hi @Brad M., have you considered Melrose as an option? Great school system, close proximity to Boston and the Seaport (10-12 Miles), orange line accessible, holds value very well, and more for your money compared to the other two towns mentioned. 

    One option to consider with regard to your investment property would be to sell the condo, where you’ve already gained susbstantial equity, and roll it into a better cash flowing multi family property (or properties). However, to produce more cash flow you’d have to be looking at more suburban markets where you would likely need a PM - likely somewhere outside 495. 

    0Reply
  • Charlie MacPherson
    China, ME · Member since 2014 · 3k+ posts · 4k+ votes
    8y

    @Brad M. The parent situation changes everything.  Still, as a general rule, the farther you go from Boston, the lower the prices will be.  That said, there are some exceptionally expensive towns in near-metro west.

    Towns like Newton, Dover, Wellesley, etc. will make your bank account cry.  In fact, the average listing price for homes now on the market in Lincoln, Wayland and Concord is currently $1.95M.  There's some *expensive* real estate in that neck of the woods!

    Just for fun, look at 495 Hugh Cargill Rd, Concord.  

    https://www.realtor.com/realestateandhomes-detail/...

    15 rooms, 6 beds, 7 1/2 baths, 10,395 square feet of living area on 23.51 acres.  Listed at the bargain basement price of $12.5M.  Property taxes are just $60,528!

    Fantasies aside, I don't know that market as well, but one thing to think about west of the city is that if you're driving to work, you're driving directly into the sunrise every morning and into the sunset every evening - at least during certain months of the year.  That adds another slice of misery to your commute.

    Again, commuter rail can be your friend.

    If you decide to buy in metro west, let me know if I can help.

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y
    Sell the condo now, in 2-4 years sell your current primary when you are ready to move....you get the 121 exclusion on both.
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  • Brad M.
    OP
    Boston, MA · Member since 2017 · 10 posts · 2 votes
    8y

    @Wayne Brooks We could do that but assuming avg appreciation rates in my area for 3 years, the tax from selling our primary would only be $10k-$15k.  I would earn more than that in just cashflow from the investment property within the same timeframe. So to me, selling them two years apart for the sole intention to receive the 121 exclusion doesn't seem like a valid enough reason to make the decision final. Unless I'm missing something? I'm not concerned about having to pay the tax on my primary, its the investment property I'm worried about which by 8/2019, would be around a $60K bill.

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  • Brad M.
    OP
    Boston, MA · Member since 2017 · 10 posts · 2 votes
    8y

    @DJ RichmondThis is a bit off topic but I feel like stating my opinion on this because I get this response all the time, "Why don't you move to Melrose, Stoneham, Woburn, etc.." I'll preface this by saying I didn't grow up in MA and I am from Anchorage, Alaska and MA doesn't even have 1 town close the crime rate in Anchorage. 

    Sort by all crime and you'll see Anchorage as 17th...I'd advise to not sort by Rape...it's disturbing

    https://en.wikipedia.org/wiki/List_of_United_State...

    Some will say that the town you are raised in doesn't matter and it's about parenting and other factors. Here is my argument to that. Yes, I am living proof you can do well in life being raised in that environment, I know plenty of people who went on the become lawyers, doctors, make a good living, great morals, etc... The difference is I know a ton of more people who didn't and ended up in a bad way very easily to the point where it's almost a part of the culture/acceptable.

    I'm not saying Melrose is anywhere near the equivalent at all but here are some numbers for you on Melrose.

    The number of towns (over 10K residents) in MA that have a lower per capita rate of crime per category than Melrose:

    • Murder: 75
    • Rape: 62
    • Robbery: 101
    • Assault: 70
    • Burglary: 59
    • Larceny: 102
    • Motor Theft: 123
    • Arson: 66
    • Overall: 95

    Compared to these overall ranks: 

    • Wayland: #1
    • Weston: #5
    • Bedford: #7
    • Sudbury: #13
    • etc...

    My wife thinks the education system is the most important thing and from my personal experience, safety/low crime culture is the most important thing. So if the choice was, sell an investment to provide a safer environment for my kids or keep the investment and sacrifice my children's safety even a little bit, if I have the financial means, then I feel morally obligated to sell.

    0Reply
  • DJ Richmond
    Real Estate Agent · Quincy, MA · Member since 2015 · 144 posts · 65 votes
    8y

    @Brad M. I certainly respect your take on safety and education for your family and would never expect anyone to jeopardize that.

    With that being said, it looks like your current investment property nets you about $720 in positive cash flow per month. Would you consider selling that unit for a multi family property, a 3 unit building for example, in a more suburban market? One that could potentially net you $3,000 per month (approximately) in positive cash flow, to off-set the costs of living in your desired neighborhood with your family.

    0Reply
  • Brad M.
    OP
    Boston, MA · Member since 2017 · 10 posts · 2 votes
    8y

    @DJ Richmond I most certainly would be but I don't really know where to look. It's hard to find cash flow nowadays in our market. I'd be open to investing in another state but the wife would never really be on board with that. If you any opportunities I'd be glad to take a look at the numbers and look into it further. 

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