Primary residence -- Rental: Sell in ~5 yrs or hold long term?

Question

My wife and I have lived in our condo for 17 months. We are moving across the country for a new job, and are converting the condo to a rental.  We don't intend to ever move back into it.

From a tax advantage and overall investment perspective, would it be better to:

A) Hang on to the condo long term if it's doing well, and when needed do a 1031 exchange

B) Sell within 5 years - as I understand it, the 2 year/5 year tax rule for us would be 17/24 months x $500, 000 = 354166.67 of profits tax free advantage.  As I read IRS Publication 523 , I believe we qualify for a partial exclusion (not the full $500, 000 of tax exempt but at least for the time we were in the property): Work-Related Move You meet the requirements for a partial exclusion if any of the following events occurred during your time of owner- ship and residence in the home. You took or were transferred to a new job in a work lo- cation at least 50 miles farther from the home than your old work location. For example, your old work lo- cation was 15 miles from the home and your new work location is 65 miles from the home.

Bill B. · Answer

If you lived “across the country” would your first rental have been a condo in VA? Probably not. If not, then you sell. You can at least as easily buy a rental in your new state, hopefully an income tax free one. Take the tax free gain and buy one or two new properties with your profits/equity. Maybe a 2-4plex if you can.

Luciano A. · Answer

@Nabeel Qureshi

Sorry, wasn't implying you are making a decision based on greed. Greed is what leads people to make bad decisions is what I was generalizing. I agree DC is insulated. If you decide to rent out a suggestion since you lived in the unit...... fix everything you already know was an issue while you lived there. This will help reduce any unnecessary phone calls from tenants. Look into a good property management company. Don't settle for the cheapest as that will bite you in the rear. Because you had not lived in the property for full 24 months check with a CPA or hit up some of the tax experts on here to make sure you can get that tax credit given you arent selling immediately. I have done a few primary residents sales but I was in it for full 2 years.

Best of luck

Nabeel Qureshi · Answer

Thanks @Luciano A. that is helpful. Yes, had realtor comp/analyses for both selling & renting.

Not looking at 1031, thinking for tax free gains since this was primary residence. It's Washington DC area so relatively insulated from market corrections, though if the sky truly falls and it happens to be right then, no real estate will be unaffected.

I am not motivated to rent by greed, I am motivated by interest - have never done it before, and given that this property I already own and other factors make it conducive to renting- will certainly look at new opportunities in next market as well.

Luciano A. · Answer

@Nabeel Qureshi

I am going to assume you had a realtor do a comp to see how much equity you might have in the property. Now ask yourself this question........ We are at the highest level in RE in our history. Prices are higher than they were before the last crash. With that how do you view 2024? If you think prices will still be climbing then you might want to hold. But don't let GREED dictate your decision. Another thing....... no guarantee 1031 will be around in 2024, after all, Biden has made it known he wants to get rid of this. It might not be 2021 or 2022 but 2024 might be a different story.

If I was in your shoe, I would cash out. Hope that IRS will give you the tax-free given your situation and invest in your new local market. Best of luck and safe travels to your new home

Theresa Harris · Answer

Revisit it in 4 years and see how much capital gains you'd have to pay.

Nathan Gesner · Answer

A lot could happen between now and then. If it's a good investment, hold on to it for the long-term. It may be a good idea to sell in a few years or you may discover it's worth holding it for even longer.

Nabeel Qureshi · Answer

@Nathan G. @Theresa Harris I have already made the decision to rent it out, what I am asking is should I sell it in 2024, before I get to the 5 year ownership mark to take advantage of the tax free profit per IRS Publication 523, or should I hang on to it Long term?

Theresa Harris · Answer

You need to look at the numbers.  How much could you get for rent and what are all of the costs associated with renting it?  You might be better off selling it and buying a rental in your new town.  Many times houses people bought for personal residences do not make good rentals when you run the numbers.

Nabeel Qureshi · Answer

@Nathan G.

I have run the numbers.  It cash flows positively.

Operationally, What makes it most attractive is that because it’s a condo building- the building has their own management and maintenance staff and association rules.

The interest rate is also great

Nathan Gesner · Answer

Have you crunched the numbers objectively? Run the numbers and determine if this is a good cash-flowing investment. If not, you need to sell it. If it would make a good cash-flowing investment, then hold onto it. I suspect it's not a good investment property with negative cashflow.

Primary residence --> Rental: Sell in ~5 yrs or hold long term?

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