Need your input

11 Replies

Hello Everyone,

I need your input on a decision that I'm struggling with.  We were able to get a great deal on our current primary residence back in 2009.  Initially we bought it to flip it but after renovating and marketing being dry, we decided to use it as our primary residence.  It's great home and in very central location in the bay area.  We can easily rent it out and have great cash flow.  The only issue is our school district is not the greatest so we are having send our kids to private school.  With our younger child also starting school this year, our mortgage and their tuition would be about the same now.

We also have good amount of equity in our home but I'm struggling with what to do.  Our choices are:

-Rent our home and rent in a better neighborhood with great schools.  We would be saving about 75% on our kids tuition.  Another benefit is we would be living in our desired neighborhood.

-Sell our home.  Put our equity down using 1030 exchange to maximize our gains.  Purchase a home in the neighborhood where we want to be.  Our mortgage would most likely be more than our current mortgage and kids school expenses combined.  But I guess there would be some tax benefits of it?

-Sell our home and invest the equity in a business that would generate passive income.  Rent in the neighborhood that we desire.  

My key concerns are 

-it's buyers real estate market in our area.

-I have a feeling that we are going to have another another real estate bubble pop at least in our area given how quickly the prices are rising based on the past corrective real estate cycles.  Not to mention unemployment rate being 4.4% in our area well below 7.3% state wide.  It will rise leading to some financial setback for some folks.

Given the concerns of real estate bubble, I like the idea of selling my home at a premium now in the sub-par neighborhood and purchasing a home in a great neighborhood which will be less like to see a large dip as historically seen here as well.

Please share your thoughts and opinions.  Your input is much appreciated.

Thank you! 

You mention a 1031 exchange. Have you held this property as an investment for the last one year and one day? If not, it cannot qualify for a 1031 exchange.

If so, let's look at what your profits are. Do you and your wife own the property together? If so, you pay zero capital gains taxes on all PROFITS up to $500,000. You must have owned it and lived in it for at least two of the last five years. Take the amount of money you spent on the purchase of the house, subtract all your costs associated with the flip, and if the total profit is less than $500,000, it would cost you money down the line to use it as a 1031 Exchange now. 1031 only defers capital gains taxes. 

You say that it is a buyers market right now, but then sort of describe a sellers market. Are properties sitting for ages on the market with no bids, or are sellers receiving multiple offers and having to sort through them all? That second option is a sellers market. With prices rising quickly in your area, that could also indicate a sellers market. The problem with a sellers market is that it makes it difficult to find a property to buy, to replace the one you just sold.

While I hope for my own selfish reasons, that there is a housing bubble about to burst, I wouldn't count on it right now. I think the hot markets we are currently seeing are just the result of the low markets we saw for so many years finally coming up to where they should be. In 2006, there were a whole load of people in houses they shouldn't have ever been qualified for. But the NINJA mortgage is now gone. Have you tried to get a mortgage lately? New regulations in place make sure you can actually afford your property before they are approved.

Homeownership is nearing historic lows, with a surge in rental growth predicted in the next 5 years, according to a Wall Street Journal article from 6/8/15.

That said, I would advise to rent the current place, and then rent in your desired neighborhood. That looks like the best way to save the most money. In three years, re-evaluate the income from your original house, the projected profit if you sell, and see if it is worth it to continue renting. Remember, you can only claim the capital gains tax exemption if you have owned and lived in the property for two of the last five years. They do not have to be continuous, so you could re-evaluate in four years and then just live in it for a year before you sell it.

Good luck!

@Mindy Jensen

Thank you Mindy for great insight and clarifying 1031 exchange for me.

You're correct.  I meant to say Sellers market.  I guess wishful thinking was stated above :)

We are qualified for a house in our desired neighborhood so that's not the bottleneck for us.

My concerns with renting our home are:

-Losing out on the equity if there's another collapse especially since it's not in the nicer neighborhood which is more likely retain its value.  Not that we would be in a bind but it's always nice to have flexibility and sustain the value as much as possible.  Am I overreacting here?

-Aren't there any tax benefits for having a larger mortgage?  What about your home's appreciation over time?  

Your thoughts? 

Wow! this is some great information.  I love learning something new everyday. Based on the discussion I am guessing the capital gains tax would be only waived to 250K for a single owner vs. 500K for a married couple?  Does this only apply to married people or can co-signers be included in this tax advantage?  Say I want to put my mom or sister on the mortgage/title.  Would they then be able to get the tax break as well?  Thanks for all of this!

Originally posted by @John McConnell :

Wow! this is some great information.  I love learning something new everyday. Based on the discussion I am guessing the capital gains tax would be only waived to 250K for a single owner vs. 500K for a married couple?  Does this only apply to married people or can co-signers be included in this tax advantage?  Say I want to put my mom or sister on the mortgage/title.  Would they then be able to get the tax break as well?  Thanks for all of this!

Each person who owns the property can claim the Section 121 capital gains exclusion of $250k ($500k if married filing joint) as long as the property is that person's primary residence for the previous 2 out of 5 years.

You can't simply put a relative on the title and call it a day - they need to occupy the property and treat it as their primary residence.

@Brandon Hall

 Sounds good.  I just wasn't sure it it was tied to a married partner or anyone living in the house (mainly direct family).  Thanks for the quick response!

@Mindy Jensen

Sorry for some reason I wasn't able to tag you on my initial reply.

Here it is again so you don't have to scroll through :)

Thank you Mindy for great insight and clarifying 1031 exchange for me.

You're correct. I meant to say Sellers market. I guess wishful thinking was stated above :)

We are qualified for a house in our desired neighborhood so that's not the bottleneck for us.

My concerns with renting our home are:

-Losing out on the equity if there's another collapse especially since it's not in the nicer neighborhood which is more likely retain its value. Not that we would be in a bind but it's always nice to have flexibility and sustain the value as much as possible. Am I overreacting here?

-Aren't there any tax benefits for having a larger mortgage? What about your home's appreciation over time?

Your thoughts? 

@Rahul Singh

Cash out refinance your primary residence and rent it out, move your family and rent the location in the area you want to live in, take the tax free capital from your primary you just refinanced and invest that $$$,$$$ into a investment property in a location that makes financial sense.


Frank

If your concern in about the possible bubble - sell to fix a profit and rent new place. Invest cash in better areas for RE Ask few tax professional about 500k limit - you may pay no taxes in your profit

@Rahul Singh , I am not familiar with your current market, so I can't say whether or not you are overreacting.

I see no tax benefits from having a larger mortgage. Theoretically, a more expensive house may appreciate more than a less expensive house, but that isn't always the case. 

@Mindy Jensen

 @Frank R. 

@Jane A.

Thank you all for great input.  You all have been a great help to narrow down my choice.

I'm moving towards keeping our current home and renting it out.  I dont want to refinance to pull money out because I have great interest rate and don't want to impact the cash flow on the property.  We have flexibility to not have to touch it to invest our side our area.

Any areas you guys like that makes good cash flow sense outside of bay area.

Thank you once again.

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