Cashing out of high gain home

Los Angeles County, California
Personal Finance
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Cashing out of high gain home

Russell Sherman
Member since 2022 · 25 posts · 22 votes

I would like to get opinions to help me determine my best financial options.

I am 59 and last year was forced into retirement and also got divorced.  My settlement was a single family home I purchased for $295,000 in the 1990’s.  The last 8 months it has been rented for $4550.  I just received an out of the blue offer to sell for $1.5M, which is a reasonable offer for the neighborhood.

I hate being a landlord and would like to sell but don't know what to do with the money. I can take $250,000 exclusion and 1031 the rest into…. what? DST's? 721/upreits? Mineral rights? A turnkey rental? the options are overwhelming and every advisor I ask gives conflicting advice - I suspect they only know what they get commission on.

I would like $5000 month income after banking the $250k.  I don’t want to risk the principal.  Am I better off just paying the capitol gains and banking the rest?

Finally, I had a property manager but found them creating false repairs and fired them.  The sale of the house is about 2/3’s of my wealth.


thoughts?.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y

@Russell Sherman,  All of the options you list that you could 1031 into come with some risk.  

Mineral rights and Oil is a roller coaster ride.  

Vacation rentals???  Well they're not making any more beach front. But your experience with managers make this iffy. 

DSTs? not sexy or high returning but fairly stable.  Especially if you took the rest of your 1031 and put it into several different ones to mitigate risk.  

A 721 - I'll probably get flamed for this but I never think converting tax deferred to taxed is ever a good idea.  But if you're going to do that then do it quickly and take the bandaide off quickly.  Don't go into a 721 with limited options at a time when many reits start to under perform.  Take the cash and don't a 1031.  Pay your tax and invest in something that you know or.... don't invest at all.  Do you have a mortgage on your house?  Pay it off.  

If you are done with work then you need to first provide for your future and then after that is secure you can invest if you have any excess money.  

I know I know.  It's not the exciting answer.  But the kind of exciting that comes from a sinking investment that represents 66% or your net worth is not a goood feeling exciting.


If you have options to work again.  Then my advice would be completely different. 

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  • Kenny Cho
    Real Estate Broker · Los Angeles, CA · Member since 2023 · 21 posts · 1 vote
    3y

    Depending on the neighborhood, it might make sense to just hold it, unless you NEED the cash now.

    You can do a HELOC to get some access to cash.

    Find a good management company and just collect the income.

    0Reply
  • Russell Sherman
    OP
    Member since 2022 · 25 posts · 22 votes
    3y
    Quote from @Kenny Cho:

    Depending on the neighborhood, it might make sense to just hold it, unless you NEED the cash now.

    You can do a HELOC to get some access to cash.

    Find a good management company and just collect the income.

    It’s a desirable neighborhood - Hancock Park.  I initially had a property management company but found them unreliable and basically flaky.  I have 18 months in which to sell and remain eligible for for 121 exclusion of $250,000.  I don’t need the cash right now but I am afraid of the economy and do not like the stress of being an absentee landlord - I now live in Mexico.  This is the biggest financial decision I will have to make for the remainder of my life.  I can’t afford another mistake.
    0Reply
  • Kenny Cho
    Real Estate Broker · Los Angeles, CA · Member since 2023 · 21 posts · 1 vote
    3y
    Quote from @Russell Sherman:
    Quote from @Kenny Cho:

    Depending on the neighborhood, it might make sense to just hold it, unless you NEED the cash now.

    You can do a HELOC to get some access to cash.

    Find a good management company and just collect the income.

    It’s a desirable neighborhood - Hancock Park.  I initially had a property management company but found them unreliable and basically flaky.  I have 18 months in which to sell and remain eligible for for 121 exclusion of $250,000.  I don’t need the cash right now but I am afraid of the economy and do not like the stress of being an absentee landlord - I now live in Mexico.  This is the biggest financial decision I will have to make for the remainder of my life.  I can’t afford another mistake.


    1) Hancock Park is one of the best neighborhoods in LA. It is a very low risk move to just hold it.
    Is it actual Hancock Park or an adjacent area?

    2) If you have tons of equity, holding it might be the most risk free move you can make. If you sell it, you now have all this cash you gotta but in another asset.

    Look for a good management company. Don't try to skimp on the fees they charge. 

    Hancock Park real estate is a good hedge against inflation/economic downturn. 

    0Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    3y
    Quote from @Russell Sherman:

    I would like to get opinions to help me determine my best financial options.

    I am 59 and last year was forced into retirement and also got divorced.  My settlement was a single family home I purchased for $295,000 in the 1990’s.  The last 8 months it has been rented for $4550.  I just received an out of the blue offer to sell for $1.5M, which is a reasonable offer for the neighborhood.

    You need to make some value judgments. PERSONAL value judgments. Specifically, you're in a high-stress situation (for you -- living in Mexico, don't like being a landlord, too many investment options, etc.) and a lot of your indecision/stress is based on a desire to avoid taxes. Specifically, you want to avoid long-term capital gains taxes (15%) on $1.2 million ($1.5 million minus the $300k you bought for).

    And it's actually less than that, because you can exclude $250k from the $1.2 million, so now you're down to 15% on 1 million, or $150,000.

    For your peace of mind, is the payment of  $150,000 -- resulting in clear ready cash of $1,350,000 -- worth it? Only you can answer that question.

    If it is, then pay the tax and knock off getting the vapors over "paying taxes." If it isn't, then do a Starker exchange (1031) and accept your lot in life.

    0Reply
  • Russell Sherman
    OP
    Member since 2022 · 25 posts · 22 votes
    3y
    Quote from @John Clark:
    Quote from @Russell Sherman:

    I would like to get opinions to help me determine my best financial options.

    I am 59 and last year was forced into retirement and also got divorced.  My settlement was a single family home I purchased for $295,000 in the 1990’s.  The last 8 months it has been rented for $4550.  I just received an out of the blue offer to sell for $1.5M, which is a reasonable offer for the neighborhood.

    You need to make some value judgments. PERSONAL value judgments. Specifically, you're in a high-stress situation (for you -- living in Mexico, don't like being a landlord, too many investment options, etc.) and a lot of your indecision/stress is based on a desire to avoid taxes. Specifically, you want to avoid long-term capital gains taxes (15%) on $1.2 million ($1.5 million minus the $300k you bought for).

    And it's actually less than that, because you can exclude $250k from the $1.2 million, so now you're down to 15% on 1 million, or $150,000.

    For your peace of mind, is the payment of  $150,000 -- resulting in clear ready cash of $1,350,000 -- worth it? Only you can answer that question.

    If it is, then pay the tax and knock off getting the vapors over "paying taxes." If it isn't, then do a Starker exchange (1031) and accept your lot in life.

    I believe the capital gains tax rate on gain over 500k is 20%, plus California is another 12.3%.  So a significant portion could be taxed at 33%.  A third is a lot to give up if I can help it, especially since I was forced into early retirement.  The house is my divorce settlement.  It’s all I have left. I need to make it count.  If I was 30 and still had a career in front of me, it would be different.  

    I appreciate all the thoughtful insight everyone has contributed 
    1Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    3y

    @Russell Sherman

    As mentioned, first make sure it qualified as an investment property after only 8mo of renting.

    Given you have a high tax burden and you seem to have a flexible life, try to the @Dave Foster approach (for lack of better term) to 1031 into some smaller homes, rent them out, move into it after 1 year, stay for a couple of years, then sell it to take advantage of the pro-rated sec121 exclusion to keep excluding your tax liability "little by little."  That may be a way to go.  You just need to be willing to be mobile...

    1Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    3y

    @Russell Sherman yes you have some tough decisions to make. I was in a similar position, and went through the same scenarios ;)

    1- basically decide if you want to sell it for sure. As @Kenny Cho stated you have prime real estate, and that in itself is a good hedge and generally safe asset to keep long term. I basically did that- I sold part of my portfolio in lesser areas that appreciated a lot in 2021/early 2022, paid cap gains, and used the proceeds to knock down all my debt on the prime rentals I wanted to keep long term. But of course in your case it’s only one property, so all or none is more extreme.

    2- if you do sell, I think would split the proceeds in 2 or 3 directions. Maybe defer some $$ and try out DSTs. And the rest cash out and go into stocks (gradually, dollar cost average to minimize risk), safe savings/treasuries, and some maybe in private RE syndications. Keep in mind that both DSTs and syndications carry risk, especially now imo with the market going down/sideways. Personally I hope I can keep my prime properties in perpetuity, but I realize that at some point I may need to sell them off. Then I’ll be forced to make the same decisions, and absent any clear winner, I’d probably diversify in 2-3 different directions, hoping to generate a similar return that my rentals had, without taking on too much risk.

    Best of luck, and let us know what you decide to do!

    P.s. where in Mexico are you based? My wife and I toy around with getting a place in Bucerias (near puerto Vallarta)…but for now we’re annual visitors :)

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    3y

    Sell and seller finance it.  Avoid the tax hit and get 7+% return backed by real estate you know well.

    0Reply
  • Russell Sherman
    OP
    Member since 2022 · 25 posts · 22 votes
    3y

    I’ve decided to hold off selling for now and reevaluate in 2024.  Firstly, I don’t want to risk the IRS challenging my claim of it being an investment property after only holding it 8 months.  In 2024 it will have been two tax filing periods and less likely to be challenged.  I have through 2025 to claim the $250k exclusion as Dave Foster describes in his book.  Secondly, this will give me time to decide what exactly to do.  As many have pointed out I have been going through significant changes in a short period of time.  Ultimately, I am only getting a 3% return on the asset.  I believe I can sell, take the 250k cash exclusion, roll the rest into other investments and still gross more than I am getting in rent - without the headaches.  Thank you for all the thoughts.  They have been very helpful.

    I am in San Miguel de Allende - a great place to be while getting your head on straight.

    2Reply
  • Rich Chavez
    Member since 2022 · 11 posts · 4 votes
    3y

    Cant 1031 a primary into an investment. 

    0Reply
  • Russell Sherman
    OP
    Member since 2022 · 25 posts · 22 votes
    3y
    Quote from @Rich Chavez:

    Cant 1031 a primary into an investment. 

    Read the entire thread, especially Dave Foster’s post where he mentions his book.  Then buy the book and read it, paying close attention to the chapters he references.
    1Reply
  • Simon Misiewicz
    Member since 2022 · 23 posts · 9 votes
    3y

    Here are some points to consider:

    1. Capital Gains Tax: If you sell the property, you may face capital gains tax on the appreciated value. Taking advantage of the $250,000 exclusion for single taxpayers (or $500,000 for married taxpayers) can help reduce the tax burden.

    2. 1031 Exchange: If you decide to proceed with a 1031 exchange, you must identify and acquire replacement properties within specific timeframes. This strategy can help you defer capital gains tax and reinvest the proceeds into other income-generating properties. Consider the potential risks and benefits of the replacement properties carefully.

    3. Risk Tolerance: Your risk tolerance is a crucial factor in deciding how to invest the sale proceeds. Low-risk options like bank savings or CDs may offer lower returns, but they also have less potential for loss of principal. Higher-risk options like investing in real estate syndications (DSTs, UPREITs), turnkey rentals, or mineral rights may offer higher returns but come with higher risks.

    4. Cash Flow Needs: To achieve your desired $5,000 monthly income, consider how much of the proceeds you'll need to allocate to income-generating investments. Additionally, account for expenses, taxes, and inflation when determining your cash flow needs.

    5. Diversification: Selling a rental property can be an opportunity to diversify your investments. Consider spreading the proceeds across various asset classes to reduce concentration risk.

    0Reply
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