Figuring out my next step

4 Replies

Hi  BPters 

I bought a main residence townhouse 15min outside Chicago for 160k couple years ago. I totally remodeled it (myself) new bathrooms, kitchen, windows, doors, flooring etc. Mortgage loan has 100k left. Current comps are 200-240k. Comp rents are $1300-1500. I only make about 40k yearly. My only debt is mortgage but my DTI ratio wont allow me to buy more property. As a primary residence for 2years I wouldnt pay sale taxes but I prefer to rent it. If I brrrr it wouldnt I loose the ability to sell it tax free? What would you do in this situation. TIA

I don't think a refi affects the capital gains exemption - any CPAs want to chime in here?

I would hold it. 160k within 15 minutes of Chicago? Real estate is a long game, unless you have a great opportunity for the cash.

@Greg Issacs doing a cash out refinance has no impact on your capital gains. Refinances are not taxable events, which is why we all enjoy going them so much! At the same time, that primary residence exclusion is very tempting as you can sell and never pay capital gains. Once you convert it to a rental you will start capturing depreciation which you have to recapture and you will have to pay long term capital gains eventually. Only you can decide whether or not this property fits into your long term strategy.

@Greg Issacs - Might need a little more information about your PITI after, but I personally would go for the refi and BRRRR. I believe, as long as you have lived in it for 2 out of the last 5 years you could still sell it in its 5th year and not need to pay any capital gains taxes. @Steven Hamilton II can confirm since he is the tax.

Next thing I'd do is figure out how to get your income higher.....maybe some side remodeling work if you already know how to do that?  Or some type of gig work?

A refinance will not change this. You have 3 years from the date you move out to sell the property and exclude the gain. You will still be subject to tax on the depreciation you take. I would strongly recommend you consider a conversation with a competent accountant.