Advice and Recommendations

[Parker Robertson]

Hello,

I am hoping to get some input from the BP community on my current situation.

I purchased my primary residence 04/2022 and have been house hacking it since. My plan was to live in this property and save up a down payment for property #2, move to property #2 and house hack while making property #1 a full rental.

Property #1 has a 4.25% interest rate and has also appreciated significantly (online estimates say $25,000-$40,000 in appreciation) which is a great problem to have. Unfortunately, property taxes and HOA fees have also risen, while rental rates for the property have not kept up. Because of this, my property will no longer cashflow if rented for the estimated rate assuming I save for vacancy, maintenance, etc. If I managed the property myself and did not pay myself, I would come close to breaking even. This wouldn't be the end of the world since I could use the losses to offset my W2 income, but I would need to refer to a CPA to see if that would really be worth it.

I have a couple of options as I see it. Use the home improvement money I have set aside (~$12,00) to either 1) redo the bathrooms/kitchen to hopefully command higher rent or 2) perform preventative maintenance and lower my maintenance budget per month. These would hopefully allow me to keep the property which is my ideal situation.

Additionally, I could wait until April this year since it will be 2 years as primary residence and then sell/1031 into a new property that would hopefully make a better long term rental while avoiding capital gains tax.

Which option sounds like the better plan? Is there another strategy I haven't considered? Let me know your thoughts!

[Carlos Valencia]

Hi Parker, 

In my opinion if keeping this property is going to begin costing you money every month when you leave then I would recommend selling it since HOA and property taxes are just going to continue going up and rents will not really increase over the years then there's only so much you can do to continue justifying the rent increase. Wait until April and take your money and invest it an another property doing the same strategy house hacking but this time get a single family with future potential to add more value like an ADU or DADU to maximize your future rental income. What's great about this is that now you have experience house hacking now your not new to this.

I live in a condo myself and HOA just keeps going up every year. If I was to move out right now I would cashflow but not by much based on my area. For me I would consider renting out for the experience on managing my tenants and once I start being negative I would get rid of it. Use that money for another property that has more potential.

@Albert Bui @Matthew Kwan

[Basit Siddiqi]

1) Online esimates are estimates and your actual appreciation can be less or more.
2) While $25,000 - $40,000 of apprecation sounds exciting, it will likely be eaten up by selling costs at the time of sale assuming the price of the home is $400,000 assuming 8% as the cost to sell the home(6% realtor costs and 2% other selling costs).

[Jake Baker]

@Parker Robertson

If you do sell, you should wait till 04/2024 to close. 

The "2 out of the last 5 years" rule in real estate refers to the eligibility criteria for the capital gains tax exclusion on the sale of a primary residence in the United States. To qualify for this exclusion, individuals must have owned and lived in the property as their main residence for at least two out of the last five years preceding the sale. Single filers can exclude up to $250,000 of capital gains, while married couples filing jointly may exclude up to $500,000.

Be sure to consult with a tax professional!

[Parker Robertson]

Quote from @Jake Baker:

@Parker Robertson

If you do sell, you should wait till 04/2024 to close. 

The "2 out of the last 5 years" rule in real estate refers to the eligibility criteria for the capital gains tax exclusion on the sale of a primary residence in the United States. To qualify for this exclusion, individuals must have owned and lived in the property as their main residence for at least two out of the last five years preceding the sale. Single filers can exclude up to $250,000 of capital gains, while married couples filing jointly may exclude up to $500,000.

Be sure to consult with a tax professional!

 Thanks for the input, Jake! I have set up multiple discovery calls set up with some real estate focused CPA's to get some more guidance.

[Sean O'Keefe]

@Parker Robertson the 2 out of the last 5 years rule is referred to as a Sec 121 exclusion that @Jake Baker mentioned. 

A couple things to keep in mind if you sell

Since you didn't occupy both sides of the duplex since 04/2022 only half of the property may be eligible for Section 121 exclusion.

1031 exchange is only available on half the property you rented out. 
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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

[Parker Robertson]

Quote from @Sean O'Keefe:

@Parker Robertson the 2 out of the last 5 years rule is referred to as a Sec 121 exclusion that @Jake Baker mentioned. 

A couple things to keep in mind if you sell

Since you didn't occupy both sides of the duplex since 04/2022 only half of the property may be eligible for Section 121 exclusion.

1031 exchange is only available on half the property you rented out. 
.

.

.

*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Hey Sean,

Thanks for the comment. My current residence is not a duplex, but a SFH where I have been renting out the extra rooms. How would that affect my Section 121 eligibility?

Thanks again,
Parker