Hold or Sell rent-controlled Los Angeles duplex?

Question

I've owned an L.A. duplex for 10 years now (bought 2016) and the increasingly aggressive rent-control laws and skyrocketting costs of the last 5 years are making me consider selling to reinvest elsewhere. I have been house-hacking, living in the garage for 4 years (rough!), and just paid the back unit tenant $10k in Relocation Fees to move into the back house. I will have to get a roommate to make it work.

If I rent it back out at market rate (much higher than what my previous tenant had been paying), I maybe could get $4300. But I am feeling like I may want to sell in the next few years, and would then have to pay the tenant a big buyout again.  The front unit rent is $3717. If i move into back unit w/ a roommate, they'd pay $1600. The max amount I can increase rent on the other rented unit is 3% annually.

I'm feeling like this is not a great investment right now, but I know it's because of the buyout & resulting 3 month vacancy, and my needing to squat in my own home w/ a roommate in order to maintain control on the sell-ability of my house.

But I don't want to make a hasty decision as I had always thought of this property as my "retirement fund".  What are the numbers to look for to determine whether I should hold on to this or sell?

How would I use the ROI calculator to calculate these #s if I  refi'd my original loan in 2021 and have actual cap ex expenditures for the last 10 years? Do I run a separate report for 2016-2021, and then another report for 2021-2026? Do I include a future tenant buyout as a possible selling cost?

Thanks for any help!

Ashish Acharya · Answer

Running separate periods (2016-2021 pre-refi, 2021-2026 post-refi) is a reasonable way to isolate how the numbers actually shifted once your debt service changed, and factoring in a future buyout as a probable selling cost makes sense given you've already had to pay one, that's a real, recurring cost of doing business with this property, not a one-off.

On the tax side, that $10k relocation payment to the back unit tenant gets added to your basis in the property rather than deducted as a current expense, it's really a cost of clearing the unit for your own use, similar to how legal or buyout costs get treated in other landlord-tenant situations. Since you've been house hacking, living in the garage while renting out both units, only the rental income and expenses tied to the units you've rented out have been getting depreciation treatment, your own living space hasn't, so when you eventually sell, the gain splits between the personal-use portion and the rental portion, only the personal-use share can use the Section 121 exclusion, and only if you've met the 2-of-5-years test on that portion specifically, the rental portion never gets that exclusion and carries its own depreciation recapture at a flat 25% regardless of your regular tax bracket.

Given you're already thinking about reinvesting elsewhere, worth seriously considering a 1031 exchange instead of an outright sale, that defers both the capital gains and the recapture on the rental portion rather than triggering it all at once, especially relevant after 10 years of accumulated depreciation on an LA property that's likely appreciated significantly.

Happy to connect!

Tim B. · Answer

I think the bigger question is whether you’re trying to maximize returns or preserve future options.

I wouldn’t spend much time trying to calculate the last 10 years. Those are sunk costs. I’d focus on today and the future: what could your equity realistically earn elsewhere versus what this property is likely to produce over the next 10–20 years?

For me, the decision eventually became less about returns on paper and more about the lack of flexibility and the risks that come with owning rentals in Los Angeles County. I ended up investing out of state. That’s not to suggest you should do the same, plenty of people invest successfully here. But I do think it’s worth considering how much you value flexibility alongside the financial return.

For the calculator, use today’s estimated market value as your purchase price, your current loan balance and payment, current property taxes, insurance, maintenance, vacancy, and any expected capital expenditures. Use market rent if you’re evaluating it as a rental. That will tell you what return you’re getting on the equity you have tied up today.

If you’re comparing hold vs. sell, I’d run a second scenario outside the calculator that assumes you sell, subtract selling costs (and any taxes if applicable), and estimate what that net equity could earn in another investment. That’s really the comparison you’re trying to make.

Jason Malabute · Answer

Splitting the analysis into your 2016-2021 and 2021-2026 ownership periods is a sensible way to think about this. Keep in mind that a future tenant buyout is a real cost of selling, and the $10k relocation payment you already made isn't currently deductible; it gets added to your basis. Because you've been house-hacking, only the rented portion of the property was depreciated, so when you sell your gain will need to be split between the personal-use portion (which can qualify for the Section 121 exclusion if you meet the 2-out-of-5-year test) and the rental portion (no 121, and the depreciation you claimed gets recaptured at a flat 25%). If most of your gain sits in the rental side, a 1031 exchange is worth considering to defer both the gain and the recapture. I'd map all of this out with your CPA before you list so you know your real after-tax number.

Pouyan Broukhim · Answer

I recommend consulting with a professional financial planner to develop a comprehensive roadmap tailored to your specific goals. It is essential to work with a licensed advisor who can align with your long-term retirement objectives and provide strategic guidance on managing your current assets.

Dave Foster · Answer

@Sondra A., you really want to look at the implications of either option to help you decide. @Ashish Acharya is right. Since you are house hacking, there are more tax advantages.  Like the 121 exclusion on the primary residence portion and 1031 exchange on the investment portion of the property.  If you do choose to sell the property.

If you do qualify for the 121 exclusion, you could take a portion of the gain tax-free, but if there's any additional tax, you could do a 1031 and reinvest it into another investment property. This would allow you to reinvest into an investment property with better performance potential and take advantage of the tax dollars you would normally pay.

Hold or Sell rent-controlled Los Angeles duplex?

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