Should I sell my investment house or not

38 Replies

Hello,

I am in dilemma about my investment house whether I should keep it or sell it.

I bought a house in Austin area in 2007 for $310k which includes down payment, closing cost. Lived in that house till end of 2008 then moved to new location because of job. So had put this house on lease since then.

So far, I have paid $150k which includes principal payment, mortgages, expenses, refiance cost, few changes in house. and now balance mortgage is $199k and as per Zillow market price is $364k. I have refinance my investment mortgage at rate 3.50 in 2012. so my monthly mortgage is around $1200 plus around $9000 property tax expense. I am getting around 2100 rent on this house and paying 6% of rent to property management company.

So far, I am not making any money but paying around $5000 - $6000 per year from my pocket to keep this house. 

In  one sense, It is good that I have a fixed asset and hopefully in future it will give me profit.

But I want to know other people view on this - Whether I should keep this house or sell it and put cash into money market account so money can grow must faster.

As this house is more than 7 years old, next year I have to replace carpet and probably few more investment to replace old house hold items.

Please share your view so I can make a decision on this.

Thanks

You could consider where the Austin housing market is. The property  has appreciated somewhat but will it continue to go up or do you think it's at the top of the market? You're paying $9K/year property taxes on a house worth less than $400K? That's pretty steep but not really anything you can control I guess unless. Is that a correct figure? Also, I assume you are depreciating the property and all expenses/income are going on a Schedule E? What is the whole picture looking like with insurance and other operating expenses? What are the loan terms? I'm inclined to think you need to sell and get your cash out of the house and find a better investment. Those taxes are killing you. Drop that house in another market somewhere and you could reduce your taxes by 70%. 

@Hemender Devangan

I would echo Rob's question, are you using depreciation of the property to reduce the 5-6K you are paying out of pocket on this house?

Hello,

Rob and Jai thanks for your response. So far, I have not depreciated my property in Schedule E as my tax consultant never did and I was not aware about it.

$5000- $6000 loss after payment for landlord insurance ($1400 per year), HOA (510 per year) includes all operating.

For example, last year rental income was $24,649.1 and 

Paid property tax $8,745.45, Expenses $4,680.55 which includes property management fee, maintenance and other misc. expenses, Paid $7,913.96 principal amount and paid interest $7,170.76 so lost around $5,700 as negative cash flow.

My loan terms is 20 years for 3.5% interest rate and remaining loan term is 18 years. 

As I have not depreciated my house ever, Can it be a  problem if i sell my house ?

What about realtor fee and profit and gain taxes if I sell my house.Then probably I am going to loose more money than $6000 per year for few years then take advantage of appreciation of property price plus more equity in house.

Thanks

To add to the comments made above...

@Hemender Devangan

I was in a similar situation before, with a California property with negative cash flow.  My numbers were very close to yours actually.  Once the property started appreciating and reached a balance point (vs taxes and money out of pocket each month/year), I decided to sell.  

I have since reinvested the equity I was able to take out and recuperate from this negative asset into "proper" cash flowing property in other states.  I was able to flip a house that was costing me around $10K per year, into several that make around $10K per year.  That's a $20K swing!  I think that was the best move I could do with that particular property.

When it comes to buy and hold real estate, to me, it's got to cash flow to make sense. If you have to feed the property, it makes sense to sell it. Especially since you can pull out all of that equity and use it to buy some properties that actually do make a return. 

As Rob noted, you never know if appreciation will continue in any given area.

@Hemender Devangan

In Texas, Zillow is very unreliable to put it kindly as a barometer of what the property is worth. I would contact a Realtor or since I am a Broker in Austin and have MLS access you can message me and I will give you an idea of what it is worth

The Austin market is very hot right now and if I were you I would seriously consider taking advantage of the hot market and purchase an income producing property closer to home

It may make you feel good to wait until you have made your money back before you sell, but what is really important is your return on investment for that $150K or so  you have in that house.  If having $150K plus adding a few thousand a year is your best investment then keep it if not then sell it.   

As far as depreciation is concerned you were supposed to take it whether or not you did.  Here is a quick calculation.  $310K basis.  80% is land improvement gets  you $248K.  Divide that by 27.5 (year to depreciate a residential property) is a little over $9k a year.  You've rented it for six years so $54K.  Divide that by recapture rate of 25% is $13,500K, which is ballpark of what you'll pay in recapture taxes.  

Also you may be able to go back and refile for all of those years you didn't take your required depreciation.  At the very least as I understand it  you can carry it to the point of sale.  

I'm not an acct, so take that for what you paid for it. 

We faced a similar situation several years ago.  We sold and put the money into cash flowing properties.  Looking back - it was a turning point in our investing business...propelled us forward.  FYI: The story is in my podcast.. back on show #80.  

It sounds as if you are not interested in reinvesting it into cash flowing property...that is a little different.  If I were in your shoes, I might sell and pay down any other debt I had to give me options down the road.  Just my take!

No matter what, consult you accountant. :)  

Thanks for sharing your experience.

Cal, So I have to pay almost $13,500 Tax on selling price ? Say if I am able to sell house on $375k so tax will be $13500 plus tax on $65k (357k - 310k ) ?

Jonna, If I can sell my rental property then definite I will invest in another smaller rental property so I can generate profit. so looking to help find out help in Katy, Tx area who can help me to find out property and manage it.

Thanks

Hemender

I think you are better off selling and reinvesting into two $150,000 houses that will cash flow better. 

@Hemender Devangan

What does depreciation mean for capital gains tax when you sell?
Whether you used the depreciation or not when you filed taxes over the years while it was a rental, capital gains will be calculated when you sell. This is coming from me, a non-qualified person.

So I would go back and amend prior year taxes to capture depreciation. This is regardless if you sell or not, and regardless if it will cover the entire 5-6k of your expenses for that year.

Now as to whether you should sell or not this year, it is a purely mathematical one. Have a qualified person give you an estimate on selling price and net due to seller. A broker in that area should be able to do it for free. You will be paying for broker commission and you will se bottom line dollar amount back into your pocket. Take this number as X.

If X is more than depreciated value of property (hopefully it is more if your market has appreciated past the point that you bought house for), congratulations. You can avoid paying capital gains by using 1031 exchange and buy a better performing property.

In my case, my property in Wisconsin has a value of X which is lower than my depreciated value, so I will owe no capital gains tax and don't worry about buying another property to avoid cap gains.

Jai and Jeff, thanks for your sharing your views.

Based on all views expressed by different friends here. I am more inclined to sell this property and invest into two smaller properties in Katy, Texas.

But still need to understand more mathematical calculation so I should not pay any more from my pocket after selling house.

Thanks

yes but you can also deduct that $54k from your income.  Depending on your income year by year or upon point of sale.  I'll link to an article when I get back home.  Your acct should have explained all of this to you.  It's pretty basic stuff

I assume you declared the rental income on your taxes?

I think your accountant has not done their job and I'd be looking for a new one.

Other than that, I'd sell the house and get into an investment that makes money.

Cal, looking forward for that link.

Bob, Yes, I filed all rental income on tax without showing any depreciation.

Thanks

Here is an article on reporting rental income  and here is another on depreciation recapture.

Here is a key sentence:  If you already have an accountant and she never discussed “depreciation recapture” with you – you need a new accountant.

BTW if your adjusted gross income was below $100K for any of the past six years.  I suggest you fire your acct right this second.  

@Cal C.

 Wow! Thanks for the links!  I didn't even know about "recapture depreciation".  I'm sure my acct is already doing it but it's always good to know why they are doing it.

@Hemender Devangan  given what you describe as your goals you would be best served to look at selling the property that is costing you money each year and reinvest using a 1031 exchange into two or three smaller properties that are closer to home and cash flow positively. 

It sounds like you've got some clean up to on your tax reporting and you need to look at the impact of not taking the allowed depreciation.  When you sell you will have to compute the gain using the basis including allowed or allowable depreciation so you're going to get stuck in the end and need to take advantage of the tax mitigation right now.

The beauty of the 1031 is that it bypases these issues.  You would not recognize gain or trigger depreciation recapture on the sale when you do a 1031.   The tax is deferred into the next property and the adjusted basis including depreciation flows across too.  

In order to fully defer tax you will need to purchase at least as much as you sell which is why your idea of two smaller properties resonates well with this approach.

The 1031 exchange requires that you have a qualified intermediary in place before you close your sale so I would start your research now.

Sounds like you need to get a basic understanding of the rental business.  Austin is a terrific market right now...Everyone is making money.  Is your rent market rate?  What does the picture look like once you start depreciating?  If you sell and buy 2 more houses you will be buying two more loans...sounds like you already have a great rate and a 20 year loan builds equity so much faster than a 30....so thats good.  Two new loans probably cost about as much as putting in snaplock solid vinyl flooring in your current house...do it in a wood look and you'll be set for a good long while.  

If you are not depreciating, you really need to file amended returns IMO.  I am sorry but shame on you, you should educate yourself instead of relying on hired professionals without even verifying that they are doing what they are supposed to be doing.  Just going over a schedule E is all you need...to get a basic understanding of your income and expenses and depreciation.  Don't forget about tenants' rent payments building equity.  I would be surprised if a property purchased in 2007 didn't cashflow in Austin.  Oh yeah, protest your taxes.  A couple years back everyone in Travis who protested got their assessment lowered.

@Hemender, What part of town is your house located? Central? North? South? Builder Subdivision? Depending on the location the value could vary quite a bit. I have found Zillow to be inaccurate in many instances in Austin and surroundings. 

@Keith Frank is right. We need some more specs on the house. I carry one negative cash flow property in North Loop because I feel like that neighborhood is about to pop. I plan to make a few improvements and trade up soon. A long term hold of a negative cash flow property is generally a very bad idea. PM me if you want some comps from your area. Whatever you do, do not price based on Zillow. 

I would have a meeting with your cpa and discuss the tax implications for depreciation and 1031 tax exchange. Given the scenario I would most definitely do a 1031 tax exchange and buy 2 if not more cash flowing properties. 

my two cents.

Aaron

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