sold my first rental property

23 Replies

Good evening bigger pockets members. I just sold the first rental property that I ever bought. I saw several forum posts about buying your first rental property, but I did not see any about selling your first rental property. To me , it was bitter sweet , because I gained so much experience with this property. When I purchased it, they had a tenant occupying it. I had to go through the process of signing a new lease, meeting the existing tenants, doing repairs, enforcing rent payment rules, violations from code enforcement and finally an eviction.

I held this property for ten years and collected a decent amount of rent. After total rent , minus repairs, and my purchase price, I still managed to squeak out a minor profit( however, for tax purposes, it will still show a loss after the depreciation is added back in to calculate the cost basis, just my opinion). I chose not to do a 1031 tax deferral. The lessons that I learned the most, were to be firm with your rules, and definitely follow tenant screening, and don't take crap from contractors. Good luck to everyone pursuing cash flow through real estate, it can be done, but it is not easy.

     

nice post @Bernard B. - congrats on the sale. I'm going through the calculus right now on whether to keep or sell my first investment property. I would break even on it (at best) if it werent for the massive run up in DC real estate over the past decade and a half. Should I sell and just pay the taxes, or take out a second mortgage / get a heloc to free up the equity?

It’s nice to see your post and your comfort w the decision to sell. Any plans for where you’re deploying capital next?

Originally posted by @Marla B. :

nice post @Bernard B. - congrats on the sale. I’m going through the calculus right now on whether to keep or sell my first investment property. I would break even on it (at best) if it werent for the massive run up in DC real estate over the past decade and a half. Should I sell and just pay the taxes, or take out a second mortgage / get a heloc to free up the equity?

It’s nice to see your post and your comfort w the decision to sell. Any plans for where you’re deploying capital next?

 What kind of equity do you have? A few years back I sold my property in Petworth after a run up, so I could turn that 1 property into 2 properties. Im about to do the same thing and sell a property I have in Silver Spring so I can turn that into 2 properties.

Originally posted by @Bernard B. :

Good evening bigger pockets members. I just sold the first rental property that I ever bought. I saw several forum posts about buying your first rental property, but I did not see any about selling your first rental property.  To me , it was bitter sweet , because I gained so much experience with this property. When I purchased it, they had a tenant occupying it. I had to go through the process of signing a new lease, meeting the existing tenants, doing repairs, enforcing rent payment rules, violations from code enforcement and finally an eviction. 

    I held this property for ten years and collected a decent amount of rent. After total rent , minus repairs, and my purchase price, I still managed to squeak out a minor profit( however, for tax purposes, it will still show a loss after the depreciation is added back in to calculate the cost basis, just my opinion). I chose not to do a 1031 tax deferral. The lessons that I learned the most, were to be firm with your rules, and definitely follow tenant screening, and don't take crap from contractors. Good luck to everyone pursuing cash flow through real estate, it can be done, but it is not easy.  

You're right, sales aren't discussed much so glad you are sharing your experience.

Selling a rental you've had for a while is kind of weird.  Good and bad happen in each property and they kind of grow on us.  'I re-did my first sprinkler system there.  Had my first flooded basement, too.'  Funny what we remember, right?

I sold 3 of my least favorite long-time rentals over the last 15 months as they became vacant.  Tax time last year was weird. Had to separate the land sale from the house (improvememt) part.  Also, that depreciation you took needs to be recaptured.  Set aside 25% of all of it.  One of mine was $5200 a year for 11 years and increased my tax burden $13k.  Your 'loss' is Uncle Sam's gain!

Originally posted by @Steve Vaughan :
Originally posted by @Bernard B.:

Good evening bigger pockets members. I just sold the first rental property that I ever bought. I saw several forum posts about buying your first rental property, but I did not see any about selling your first rental property.  To me , it was bitter sweet , because I gained so much experience with this property. When I purchased it, they had a tenant occupying it. I had to go through the process of signing a new lease, meeting the existing tenants, doing repairs, enforcing rent payment rules, violations from code enforcement and finally an eviction. 

    I held this property for ten years and collected a decent amount of rent. After total rent , minus repairs, and my purchase price, I still managed to squeak out a minor profit( however, for tax purposes, it will still show a loss after the depreciation is added back in to calculate the cost basis, just my opinion). I chose not to do a 1031 tax deferral. The lessons that I learned the most, were to be firm with your rules, and definitely follow tenant screening, and don't take crap from contractors. Good luck to everyone pursuing cash flow through real estate, it can be done, but it is not easy.  

You're right, sales aren't discussed much so glad you are sharing your experience.

Selling a rental you've had for a while is kind of weird.  Good and bad happen in each property and they kind of grow on us.  'I re-did my first sprinkler system there.  Had my first flooded basement, too.'  Funny what we remember, right?

I sold 3 of my least favorite long-time rentals over the last 15 months as they became vacant.  Tax time last year was weird. Had to separate the land sale from the house (improvememt) part.  Also, that depreciation you took needs to be recaptured.  Set aside 25% of all of it.  One of mine was $5200 a year for 11 years and increased my tax burden $13k.  Your 'loss' is Uncle Sam's gain!

paying recapture is the most NON talked about event on BP or in real estate.. and why when folks talk about buying for only cash flow and appreciation IE speculation or gambling those folks totally miss the point and do not have a full picture of the Lifecyle of a real estate investment.. if you have NO appreciation your recapture tax is going to eat into your IRR in a negative manner.

and for a lot of folks to 1031 one little house with 20k coming out of it is hard to do.. since the house never went up.. 

the other thing is people that say they are buy and hold forever.. this rarely happens.. life happens life changes.. and so 7 to 10 years down the track MOST folks unless they have decided to make it their lifes work IE be a full time professional landlord.. they sell .

and then that pesky recapture they never knew about or thought about bites them .. :) 

@Jay Hinrichs Well said.  Depreciation is presented as a gift from the Irs but it’s not it’s a loan and payback is..

@Bernard B. Not sure if you meant to say it the way you did or not - but depreciation over those 10 years is subtracted from your cost basis not added to it.

 That’s where recapture comes in.  I fear you’re going to find that your minor gain is going to turn into a major gain because of the depreciation.

Originally posted by @Dave Foster :

@Jay Hinrichs Well said.  Depreciation is presented as a gift from the Irs but it’s not it’s a loan and payback is..

@Bernard B. Not sure if you meant to say it the way you did or not - but depreciation over those 10 years is subtracted from your cost basis not added to it.

 That’s where recapture comes in.  I fear you’re going to find that your minor gain is going to turn into a major gain because of the depreciation.

Depreciation recapture many times a nasty surprise..  :)  I sold off 12 homes I bought in MS for gozone and well I dealt with this last few years. I owned them about 10 years.. ONLY thing that made it a viable investment for me was the HUGE tax savings I got up front in years were I had massive ordianary income and I saved 100s of thousands that there is no way to get out of or deffer other than this tax treatment.. at least that what I keep telling myself..  and since the properties never really went up.. and I was like everyone else I put minimum down.. these all cost me money to sell..  and it was only the profits I made on those accelerated deppreciation and lack of paying tax in those big lump sums that made owning rentals any sense for me personally.  ( in a non appreciating market. )   Go zone giveth and taketh away.. LOL

@Russell Brazil I bought a house in

Bloomingdale about 15 years ago (before it was even called that) , nd I’ve rented it out for the last 9 years. My tenants moved out at end of August and now I’m deciding on turnover and rent again or renovate and sell. The house has appreciated at least 2x what I paid for it back then so I’ve got a reasonable amount of equity built up in it.

Would you keep hanging on in bloomingdale or take the gains and run? 

I’d like to move into Multifamily somewhere (likely not in DC area bc the prices are too high), and there are definitely multiple ways to get access to that equity to do so.

Thoughts?

Originally posted by @Marla B. :

@Russell Brazil I bought a house in

Bloomingdale about 15 years ago (before it was even called that) , nd I’ve rented it out for the last 9 years. My tenants moved out at end of August and now I’m deciding on turnover and rent again or renovate and sell. The house has appreciated at least 2x what I paid for it back then so I’ve got a reasonable amount of equity built up in it.

Would you keep hanging on in bloomingdale or take the gains and run? 

I’d like to move into Multifamily somewhere (likely not in DC area bc the prices are too high), and there are definitely multiple ways to get access to that equity to do so.

Thoughts?

 Id probably hang on to it. Bloomingdale is and will remain pretty hot.

Thanks everyone for responding to my post. Currently, I plan to hang on to the cash, and put it into my business savings account while I make further plans for the future. This was a low purchase value house( 30k), so I am not really freaking out over the 10 years of depreciation being added to or subtracted from my cost basis. ( I took a few years of accounting as part of my education).

I used this property(my first rental) as a cash generator/stabilizer for my additional rental properties. To those members considering the 1031 option, just remember that is a tax deferral option, not a tax elimination option. If I were lucky enough to find another property within the required time frame and make the 1031 exchange, I would have to still have the thoughts of future tax payments in the back of my mind for possibly years( unless I died, then it would not matter). Anyway, I will keep looking for rental property deals, if I find one , I may purchase it or I may just keep looking around for now. Keep sharing the info BP nation, it really does help a lot of people.

Great post! I bought my FIRST deal in Greenbelt, MD in 2012 for only $35,000. It paid for itself in only 3 years and now it's worth $120,000 and still cashflows nearly $1,000/month. I'm planning to hang onto it for a while longer, but I'm considering trying to take some equity out to leverage on other properties. Unfortunately, I titled it in an LLC and it's a condo, so I have not found a bank yet willing to give me a commercial mortgage on it. I learned a lot with that one, especially about vetting my tenants better. The first one, who worked for Homeland Security!, trashed the place and I had to renovate after he moved out.

My LAST purchase, only a year ago, I'm seriously considering selling parts of, LOL. It's in my hometown, Tupelo, MS, and the previous two owners hardly did any maintenance in the last 10 years. It's 10 units - 4 houses, a duplex and a quad - on 2 acres that, for some reason, was never subdivided so we got hit with a HUGE tax bill surprise in January. We inherited some shady tenants that our property manager has gotten rid of and done a LOT of work to move in better tenants, but, on top of needing to be subdivided, it is currently nickel and diming us to death, plus we need two new roofs and all of the central AC units need to be replaced soon. It was only half rented when we bought it, and we are now at only 2 vacancies - including one last unit that needs to be gutted - so money is starting to come in, it's just been an ordeal and a half. But we've learned a LOT about larger multi-family properties.

If only I could pull some equity out of my first property and sink it into my last property to get it cashflowing better, lol.

@Bernard B. Hello, I'm from Huntsville Alabama too. I now live in Atlanta Georgia. I would love to know about your experience with selling your first rental property. I am new to the real estate business. I am going to do house flips. I would like to know how you started,did you have an investor or your money . I am in the process of gathering information and networking. I would really appreciate it. Thank you

@Bernard B. you are right on a 1031 exchange, it is just a tax deferral. You are essentially transferring depreciation from one property to another. That means less deprecation to claim on the new property, than if you purchased it out right. Not a big deal, but those who think the 1031 is some magical way to avoid taxes, that is just not the case. The only way to totally avoid taxes is to die. 

I have only sold two rentals, one was an outright sale and the other was a 1031 exchange. 

People don't factor in the acquisition and sales costs of a rental property. Holding a property longer reduces the costs per year. Of course selling now, when the market is strong, may be the smart decision versus being stuck selling in a down turn.

I gotta differ with @Joe Splitrock and @Bernard B. , and not just because i'm in the industry but because I use the tool myself and have for years.

First I'd never argue that a 1031 is right every time.  Every situation has to be evaluated on it's own merits.  But that being said, it's also equally short sighted to say that taxes are inevitable so just pay them always and be done.  

There's several ways that 1031s can benefit you throughout your life.

Yep death is the great tax mitigator.  And yep you don't get the benefit of that legacy your heirs do.  And yep they may not be worthy of your love or concern for their future.  But take moment and think about the 20-30 (or more) years to your death.  You have a choice.  Either you pay $30K (just illustrative number) in taxes or you don't.  If you don't it's by virtue of a 1031 exchange.  so you get $30K that is yours to use to make money for yourself.  If you make 10% a year on it you make $3K that first year.  Is that not good enough for you?  Then how about after 20 years you've made an additional $60,000 solely because you deferred the tax through a 1031. 

And dare I even bring up the compound interest of having $30K to invest for 20 years.

The tax deferred dollars go into your pocket.  

1. You can 1031 into passive opportunities later in life where the deferred tax continues to make a return for you all your life.

2. You can use the 1031 to leverage into a nice house for retirement.  Sell your current house (tax free!!) and move into the former investment home and again never pay the tax while enjoying the tax free sale of your former residence.

3. You can defer the tax into vacation homes that also generate rent for you.  What other tax planning tool helps you plan for your retirement travels and provides you with income all at the governments expense.

4. You can convert properties from investment into your primary residence and after a period of time a portion of that unpaid tax becomes tax free.  After 10 years it could be as much as 80-90% tax free.

5. I ended up with a sailboat to live on courtesy of combining sec 121 and 1031 (www.the1031investor.com).

You can be Eyore or you can be Pooh.  Eyore was only happy when unhappy.  He loved writing checks for taxes because it hurt so good.  Pooh looked at the positives of the moment - "People say nothing is impossible, but I do it every day".

I'm a Pooh. People say you'll always have to pay the tax. But I and my clients haven't! My only problem is my children often offer me horrible food choices hoping for an early demise and access to the step up in basis.

I can say that selling your first investment property was a no brainier for us. We had purchased in St George via a short sale and had it LTR for 2 years when the market skyrocketed. WE sold and pocketed 100K then immediately bought via 1031 exchange thanks to @Dave Foster 2 new STR properties in Gatlinburg/Pigeon Forge area. We have never looked back.

Your right there needs to be more of us on here discussing our success stories. 

@Jay Hinrichs your post about the 12 MS houses is interesting. From what I get out of what you said, you found little value in them aside from the tax shelter, which for you was big obviously. Many people are flocking to purchase in markets like the MS market you had these SFR’s in (low cost, 1%+ rule, no appreciation play long term, etc). With your experience, do these markets make as much sense as everyone seems to think right now? I’m asking for myself, as I am from MS and plan to invest there, but asking for the broader audience also. Thanks Jay.
Originally posted by @Cole Raiford :
@Jay Hinrichs your post about the 12 MS houses is interesting. From what I get out of what you said, you found little value in them aside from the tax shelter, which for you was big obviously. Many people are flocking to purchase in markets like the MS market you had these SFR’s in (low cost, 1%+ rule, no appreciation play long term, etc). With your experience, do these markets make as much sense as everyone seems to think right now? I’m asking for myself, as I am from MS and plan to invest there, but asking for the broader audience also. Thanks Jay.

I think non appreciating rentals is a very long generational investment.. get them paid for keep them for even hand them down at stepped up basis to your kids.. or 1031 at some time down the track..  

Hey Dave Foster, and Stassa Austin , 

Thank you for questioning my investment philosophy ( use my cash or the cash of an investor/bank) , and pointing out the theoretical gains of a 1031 exchange. On my first rental property, I used my personal cash, no banks, or other investors. I did this to have an opportunity for greater cash flow without using high leverage to purchase the property. I also realized that this particular property would not appreciate in the near future and that was fine with me. 

  As far as the 1031 exchanges, I am not against them at all. If you have the patience to find another property to invest your proceeds into, within that certain time frame and it makes you happy, then by all means do it. Just remember, your theoretical number of a 30k profit making approximately 10% a year is highly optimistic. Exactly what would you be investing that 30k in to make such a large guaranteed return for next 10 or 20 years another rental property? If it is another rental property, it will not be easy money, even if you decide to use a professional property manager. You will still have to hustle to acquire tenants, get them to pay rents consistently, then out of those profits, you still have to deduct vacancy factors, maintenance, management, taxes, insurance all of these items will affect that 10% hypothetical return. 

    As far as selling your personal residence and needing a 1031 to avoid taxes, not necessary, if you live in your house for 2 years , you can sell it without paying huge taxes. Just saying...

@Bernard B. , My apologies.  I used 10% because I'm the only accountant in America who's bad at math!  Zero's are easier to calculate.  The true impact is that at 7% a one time investment of that $30K reaps $116,090.53 if allowed to compound at 7% for 20 years.  My miscalculation was on the conservative side.  And yes there are plenty of 7% opportunities out there just as there were 15% opportunities 3 years ago.  

Of course there's work involved!  Only the gurus think there's not.   Over a 24 year investing career I've dealt with all sorts of tenants and situations.  I do get that.  But that's the real estate game.  And I'm not sure how that somehow invalidates using 1031 exchanges.  

Please reread my option #4. My wife says I've already had my quota of wrongness for the day so I must be correct here:)

Of course the rules of sec 121(the section dealing with your primary residence) do not require a 1031 exchange.  But if you want to take full benefit of the power of the 1031 exchange then "conversions" of investment into primary residence can be used to capture some of that tax deferred gain and turn it into tax free.  This involves a change from 1031 property into 121 property.  And that is the combination I used over a period of 7 years to take a duplex in Denver into a Long Island Sound Movie set and vacation rentals in FL and slowly turn those into primary residences which were then sold for the sailboat we lived on for a decade.  The whole story is at www.the1031investor.com

Not trying to question your abilities.  You've done really well.  But your perspective on the 1031 was pretty skewed negative.  I thought I'd just cast some light on the positives.  And testify that those "hypothetical" gains you talked about can be very real from someone who's done it.  The sun is shining, interest rates are low.  And the legislative and executive branches of our government are too busy infighting to screw us up too bad.  So it's a great day.  Think happy thoughts of what could be not what can't.