Time to sell?
Jonah SlovePro Member
Member since 2023 · 77 posts · 53 votesTime to sell?
Most Popular Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes@Jonah Slove, She will be the only person eligible for the primary residence deduction. In order for you to qualify you would have had to have lived in it also for 2 out of the 5 years prior to sale. Marriage ultimately doesn't really have that much to do with the qualifying other than establishing residency and what tax return the property is reported on. It is your use.
But.... there is a great opportunity here. She will only get $250K of profit tax-free. But because it is also an investment property right now she can also 1031 the remainder.
$250K tax-free. and defer the rest of the tax in a 1031 exchange.
The 1031 Investor5134 Reviews
95 Replies
- Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes2y
Suggest trade up. Last time I could not find an exact home in the price range and exchanged for a smaller home. The difference of 120K created a capital gain tax problem. I am in Northern CA coast neighborhood.
- Rental Property Investor · New York, NY · Member since 2011 · 956 posts · 510 votes2y
Don’t see any cons in view. Sell .
- 2yRobert PaynePro MemberReal Estate Agent · Bowling Green, KY · Member since 2023 · 36 posts · 36 votes
Is it not possible to rent it out for more? $2500 for a property valued at $1.3M seems odd. The reason I ask is because I haven't seen anyone suggest a new mortgage on the property to get cash out to use for another investment. You would be limited significantly if the rent can't be raised significantly.
Also, since you will only need to 1031 a portion, the portion you don't have to 1031 can be set aside to wait for the right investment, no rush on $800k+ depending on capital improvements you can document. Be certain to have a tax advisor involved in making sure that happens correctly, the tax savings and freedom of timeline will be worth the fee.
Let's assume you come out with an additional $350k after negotiation and fees involved in selling the home that needs to be used in the 1031. Debt would be great and would allow you to go into multi-family or multiple SFH's. But this complicates the process and you may not be ready to jump into multi family. Because there is no current debt on the property, you have the freedom to buy a property without debt, and there are markets where that price will buy you a house that will rent for $2000-$2500/month. With the right PM in place, you have nearly the same cash flow out of less than 1/3 of the capital harvested from this investment. Then you can take your time figuring out what to do with the remaining $800k.
- Member since 2017 · 2 posts · 0 votes2y
Quote from @Jonah Slove:
Quote from @Andrew Postell:
@Jonah Slove tell her to look into capital gains taxes and how much she can exclude if she lived in it for 2 out of the past 5 years.
Okay, but either way it comes down to selling right? If we wanted to reinvest the proceeds from the sale would a 1031 be different than tax free capital gains?
- 2yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Jonah Slove:
My fiancé owes a small 2bed 2bath townhouse outright. It was her primary with a roommate until she moved in with me, now it is rented fully. It is valued at $1.3mil and she bought for $550k 5 years ago so not a bad return at all. Currently she only rents it for $2500mo because affordable housing is an issue in our small town..also STR is not allowed per the town. Now we are considering selling it to buy a more cash flowing property. Maybe some MFR in a bigger town an hour away. We would 1031. Pros and cons to this idea?
Here is the current actuals from appreciation: 5 years $750k, average $150k/year, average $12.5k/month.
If she purchased at 90% LTV, she put $55k down. Not accounting for compounding or closing costs, she achieved 273% annual return (with including compounding and closing costs it would be a little lower).
Do you expect a high cash flow market to produce better returns? I did not see the state, but is it a capped property tax area (such as the entire state of CA)?
If I make money from cash flow I pay taxes on the cash flow annually. If I make money via appreciation (even if realized via a refi) with current rules I never expect to pay taxes on the appreciation.
Because I have large reserves and have multiple income streams, I value gain from appreciation more than the cash flow that ends up taxed.
Good luck
- Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes2y
I know this might be a hard pill to swallow but what about selling and paying the tax and Tbill and chill for awhile have you calculated it out just so you know the tax consequences and have it as a viable option?
Jon Bock, CPA
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes2y
What would the net proceeds be? Let's say it is around $1,200,000. At 25% down, that is around $4.8M worth of real estate. That puts you in over 3.76x your equity position in the long run. To me it is a no brainer.
- Investor · CO · Member since 2016 · 757 posts · 1k+ votes2y
Quote from @Jonah Slove:
Quote from @Andrew Postell:
@Jonah Slove tell her to look into capital gains taxes and how much she can exclude if she lived in it for 2 out of the past 5 years. Renting a $1.3million home is a terrible return. She can certainly do better with other properties.
We can exclude $500k of gains if we are married. Once fees and improvements are taken off too we should be maximizing that. So what are your thoughts on our scenario? She moved in with me 2 years ago and before the property in question was her primar
- Member since 2023 · 77 posts · 53 votes2y
Quote from @Julien J.:
Did she lived in the property 2 of the last 5 years?Quote from @Jonah Slove:
Quote from @Andrew Postell:
@Jonah Slove tell her to look into capital gains taxes and how much she can exclude if she lived in it for 2 out of the past 5 years. Renting a $1.3million home is a terrible return. She can certainly do better with other properties.
We can exclude $500k of gains if we are married. Once fees and improvements are taken off too we should be maximizing that. So what are your thoughts on our scenario? She moved in with me 2 years ago and before the property in question was her primary.
Yes! She has.
- Investor · CO · Member since 2016 · 757 posts · 1k+ votes2y
I'm in a similar situation getting ready to sell 3 condos/townhouse via 1031x. Here how we thought about the making the call, maybe that will help in in making your decision:
1. De-risk: Reposition the asset out of HOAs. Increase control and pocket the HAO fees to build reserves which we get to keep if we sold.
2. Scale the portfolio: go from 3 to minimum 6 units.
3. Strategy: 3-5 yrs out, take advantage of appreciation & YOY rent increases. Likely to lower initial cash flow, but in the long term, it will be higher then if we kept to condos.
4. Leverage the investment with a loan, but keep LTV low around 40% to 50%.
5. Tax: 1031x, I'm a CPA and ran our math. Its the best course for us and our long term goals.
6. ROI & Metrics: I use my own to match my strategy. I could care less about "best" and what the gurus days.
- Member since 2018 · 113 posts · 135 votes2y
Since I have 2 daughters, I will chime in here with perhaps an unpopular take. Forgive me if my thoughts are off point.
It has already been mentioned, and I agree, that this would come across better if your fiancé were the one asking for advice, since it’s her money. With the way this is being presented, it feels like you’re talking about her money as your money. You’re not married. You might be the greatest guy in the world with the greatest intentions, but if this were my daughter’s fiancé making this post, I would have significant concerns. It seems she would be taking a massive unwise risk by doing this in a fiancé status.
How about you guys get married, have a good honeymoon, get on the same page legally + financially, and then bring this back into discussion. It is in her best interest to consider a prenup. This all seems a bit rushed. Especially with times being so volatile and the fact that you haven’t tied the knot yet. Tons of dating or engaged people out there making huge financial house selling + buying decisions before getting married and getting burned. - Member since 2023 · 77 posts · 53 votes2y
Quote from @David F.:
Since I have 2 daughters, I will chime in here with perhaps an unpopular take. Forgive me if my thoughts are off point.
It has already been mentioned, and I agree, that this would come across better if your fiancé were the one asking for advice, since it’s her money. With the way this is being presented, it feels like you’re talking about her money as your money. You’re not married. You might be the greatest guy in the world with the greatest intentions, but if this were my daughter’s fiancé making this post, I would have significant concerns. She would be taking a massive unwise risk by doing this in a fiancé status.
How about you guys get married, have a good honeymoon, get on the same page legally + financially, and then bring this back into discussion. Seems a bit rushed. Especially with times being so volatile and the fact that you haven’t tied the knot yet. Tons of people out there making huge financial house selling/buying decisions before getting married and getting burned.David, she is reading right along with us. We are on the same page. This is not happening in the near future, nor without legal counsel from somewhere besides the internet. We are trying to learn what options may be best for us as a family. Thanks for your concern...
- Real Estate Investor · Reno, NV · Member since 2016 · 71 posts · 67 votes2y
@Dave Foster not an expert but pretty sure you are wrong. If they get married they will get the $500k. I did that exact thing and was one reason why we got married. I had a tax professional prepare my taxes with no issues.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes2y
Quote from @Dan H.:
Quote from @Jonah Slove:
My fiancé owes a small 2bed 2bath townhouse outright. It was her primary with a roommate until she moved in with me, now it is rented fully. It is valued at $1.3mil and she bought for $550k 5 years ago so not a bad return at all. Currently she only rents it for $2500mo because affordable housing is an issue in our small town..also STR is not allowed per the town. Now we are considering selling it to buy a more cash flowing property. Maybe some MFR in a bigger town an hour away. We would 1031. Pros and cons to this idea?
Here is the current actuals from appreciation: 5 years $750k, average $150k/year, average $12.5k/month.
If she purchased at 90% LTV, she put $55k down. Not accounting for compounding or closing costs, she achieved 273% annual return (with including compounding and closing costs it would be a little lower).
Do you expect a high cash flow market to produce better returns? I did not see the state, but is it a capped property tax area (such as the entire state of CA)?
If I make money from cash flow I pay taxes on the cash flow annually. If I make money via appreciation (even if realized via a refi) with current rules I never expect to pay taxes on the appreciation.
Because I have large reserves and have multiple income streams, I value gain from appreciation more than the cash flow that ends up taxed.
Good luck
He said it was in Jackson, WY. I'm on the fence after reading the other comments. I would keep it and try to leverage the appreciation, maybe cash out refi and buy another property. I briefly considered selling my San Francisco Bay Area SFH with lots of equity and doing a 1031 exchange out of state for multi-units or several SFHs for "more cash flow". I'm keeping that house.
Maybe 1031 exchange to another property nearby - I would be cautious about long distance investing especially with cheaper cities or properties. Your cash flow could be eaten up by tenant turnover, capital expenses and smaller repairs adding up over the years even though on paper they cash flow when you run the numbers.
I also invest out of state (Indianapolis metro area) and there are challenges with being 2000 miles away. You can't see the property often and video and pictures are no substitute for seeing it in person. You have to have a solid, reliable and trustworthy team. That being said, I have CA investor friends who buy in multiple states without ever seeing their properties, depends on your risk tolerance.
- 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Tj M., You got away with one :).
There is. both an ownership test and a residence test. The ownership test is that you have to have owned it for two out of the previous 5 years (quote from pub 523 - For a married couple filing jointly, only one spouse has to meet the ownership requirement)
For the use test you must have lived in it for 2 out of the 5 years prior to selling it. (again from pub 523 - Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.)
The 1031 Investor5134 Reviews - Laveen, AZ · Member since 2016 · 584 posts · 528 votes2y
Quote from @Jonah Slove:
My fiancé owes a small 2bed 2bath townhouse outright. It was her primary with a roommate until she moved in with me, now it is rented fully. It is valued at $1.3mil and she bought for $550k 5 years ago so not a bad return at all. Currently she only rents it for $2500mo because affordable housing is an issue in our small town..also STR is not allowed per the town. Now we are considering selling it to buy a more cash flowing property. Maybe some MFR in a bigger town an hour away. We would 1031. Pros and cons to this idea?
I'd normally say hold but, at today's rental numbers it's going to take aboutb 20+ years of rent to get the half million dollars.
if someone hasn't said so already, an alternative is to pull cash out and buy other properties if you want to benefit from this property's growth potential while avoiding the taxes or 1031 requirements
As I'm sure you know, that half million can buy you apartment buildings producing better cash flow of that's your aim
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes2y
Quote from @David F.:
Since I have 2 daughters, I will chime in here with perhaps an unpopular take. Forgive me if my thoughts are off point.
It has already been mentioned, and I agree, that this would come across better if your fiancé were the one asking for advice, since it’s her money. With the way this is being presented, it feels like you’re talking about her money as your money. You’re not married. You might be the greatest guy in the world with the greatest intentions, but if this were my daughter’s fiancé making this post, I would have significant concerns. It seems she would be taking a massive unwise risk by doing this in a fiancé status.Exactly. I wasn't going to comment but this thread just won't go away. 'She has a house'. 'She rents it for $x'. 'We want to sell'. Wait, what??
Legally Jonah is a roommate. That's it.
SHE can sell, take $250k gain tax-free and 1031 the balance or pay the taxes.
I would sell either way. I sell nice singles when rent drops below .5% of value per month. And .5% is lower than most would accept. Nice houses, not c class or hood.
For example, a home increases to $400k but rent is only $2k. Sell it. In HER case, if rent was less than $5-6k which it clearly is. Sell it.
- Rental Property Investor · Los Gatos, CA · Member since 2017 · 123 posts · 131 votes2y
Maybe you, Jonah, should get a prenup to protect yourself. Now that everyone should have a prenup and you'll get divorced scenario is out of the way so she/you should cover yourself is covered I'll answer as if this was me in her shoes.
If marriage is near I'd wait and consider selling to get the $500k tax free, so long as you qualify. The exchange is great but just kicks the tax can down the road. Tax free money all day long, you're now playing with house money. I would not invest in Detroit unless you are from Detroit and know the area very well. I would and do stay close to home in a decent sized city so you know and are familiar with your rental market. I'd get a few smaller sized properties 4 units or less so the property is more liquid, next thing you know you find out in a few years that this isn't your game and you want to change your investment strategy and if it's your game it'll be easier to cash out/trade up. In addition I'm guessing you're both W-2 employees, financing 4 units below will be a little easier.
Don't scale too quickly, you're not going to miss the boat. Looking back a year and a half ago, people would now say you shouldn't have bought then. I bought a few properties then, bought them right and still sold for a profit within the last few months even with the interest rates tripling. The best time to invest is always today, just buy right, don't pay market or over. You don't want to be in a position of I have to get this one, wait for or structure the right deal to make it good for you. Negotiate the right deal and you'll always be good.
Buy and hold, you will most likely look like a genius in the next 20 years. As the late Will Rogers once said "Don’t wait to buy real estate. Buy real estate and wait." Enjoy the journey man and definitely enjoy the time with your fiancé and soon to be wife. Real estate is the best way to create a life to enjoy the most precious asset we all have, time. Life is too short to worry about all the small stuff and nonsense the internet creates for us. Good book recommendations if you haven't read them; Medici Effect, 4 hour work week, F*ck your feelings.
- 2yEvan MillerPro MemberInvestor · Denver, CO · Member since 2017 · 41 posts · 21 votes
From a numbers standpoint, the highest use of this capital is to sell and buy another investment, or even just invest in the markets. Even if she just pays the capital gains tax - likely 15%-16% effective unless she has a very high income - it shouldn't be very hard to beat the return she is getting on that true equity. 1031 is not even necessary to justify selling. Here's the quick math:
$1,300,000 (Sale Price) - $130,000 (Sales costs 10% of sale price conservatively) = $1,170,000 net
$1,170,000 (net sale proceeds) - $550,000 (cost basis assuming no improvements) = $620,000 Capital Gains
$620,000 (Gross Cap Gains) - $250,000 (Cap Gains waived for primary res) = $370,000 taxable cap gains
$370,000 x 0.15 = $55,500 cap gains taxes owed
$620,000 (capital gains not including original equity in the home from downpayment and principal payments over 5 years) - $55,500 (cap gains tax) = $565,000
That $565,000 number is the apples to apples number that you want to make sure you're getting the best return you can from. $2,500 monthly rent (not subtracting monthly expenses and mortgage payments yet) is $30,000 annually which is 5.3% return. Assuming at least 50% of the rent is going to expenses and mortgage payment, now she's making 2.65% on her money. She can get that in a high yield savings account. No hassle, 100% liquid.
Now factor in the equity she had at the beginning, the option of using a 1031 exchange, and intelligently investing the proceeds and there is a TON of room to improve the return on this capital!
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Rodney Sums:
Quote from @Jonah Slove:
My fiancé owes a small 2bed 2bath townhouse outright. It was her primary with a roommate until she moved in with me, now it is rented fully. It is valued at $1.3mil and she bought for $550k 5 years ago so not a bad return at all. Currently she only rents it for $2500mo because affordable housing is an issue in our small town..also STR is not allowed per the town. Now we are considering selling it to buy a more cash flowing property. Maybe some MFR in a bigger town an hour away. We would 1031. Pros and cons to this idea?
I'd normally say hold but, at today's rental numbers it's going to take aboutb 20+ years of rent to get the half million dollars.
( if acceleration is faster followed by flat growth ) > (rental growth) then best is just to sell
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Bobby Nilsen:
Maybe you, Jonah, should get a prenup to protect yourself. Now that everyone should have a prenup and you'll get divorced scenario is out of the way so she/you should cover yourself is covered I'll answer as if this was me in her shoes.
If marriage is near I'd wait and consider selling to get the $500k tax free, so long as you qualify. The exchange is great but just kicks the tax can down the road. Tax free money all day long, you're now playing with house money. I would not invest in Detroit unless you are from Detroit and know the area very well. I would and do stay close to home in a decent sized city so you know and are familiar with your rental market. I'd get a few smaller sized properties 4 units or less so the property is more liquid, next thing you know you find out in a few years that this isn't your game and you want to change your investment strategy and if it's your game it'll be easier to cash out/trade up. In addition I'm guessing you're both W-2 employees, financing 4 units below will be a little easier.
Don't scale too quickly, you're not going to miss the boat. Looking back a year and a half ago, people would now say you shouldn't have bought then. I bought a few properties then, bought them right and still sold for a profit within the last few months even with the interest rates tripling. The best time to invest is always today, just buy right, don't pay market or over. You don't want to be in a position of I have to get this one, wait for or structure the right deal to make it good for you. Negotiate the right deal and you'll always be good.
Buy and hold, you will most likely look like a genius in the next 20 years. As the late Will Rogers once said "Don’t wait to buy real estate. Buy real estate and wait." Enjoy the journey man and definitely enjoy the time with your fiancé and soon to be wife. Real estate is the best way to create a life to enjoy the most precious asset we all have, time. Life is too short to worry about all the small stuff and nonsense the internet creates for us. Good book recommendations if you haven't read them; Medici Effect, 4 hour work week, F*ck your feelings.
read line by line answer here is really one the best advice from investor to another investor
buy and hold
and take it easy
dont scale too quickly
invest locally while youcan
if you live in san diego and you have MF in detroit, you would learn nothing, invest locally ! - Member since 2023 · 5 posts · 2 votes2y
You Usually don't want to sell your property... maybe see if it's worth doing a heloc or cash out refi to invest in another property.... meanwhile, try increasing rent by getting new tenants. How much cashflownis the current rent giving you? Rule of thumb is that rent should be at least 1% of the purchase price to make your best ROI
- Member since 2023 · 3 posts · 0 votes2y
Have you considered either a heloc or a cashout refi? Leverage the equity instead of selling an appreciating asset
- Real Estate Broker · Los Gatos · Member since 2020 · 74 posts · 16 votes2yMy first question is do an analysis on ROE vs a new investment and let the data speak!
Quote from @Jonah Slove:
My fiancé owes a small 2bed 2bath townhouse outright. It was her primary with a roommate until she moved in with me, now it is rented fully. It is valued at $1.3mil and she bought for $550k 5 years ago so not a bad return at all. Currently she only rents it for $2500mo because affordable housing is an issue in our small town..also STR is not allowed per the town. Now we are considering selling it to buy a more cash flowing property. Maybe some MFR in a bigger town an hour away. We would 1031. Pros and cons to this idea?
I can assist with Commercial Investments across the US - if you would like to explore NNN
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