“I’m Moving. Should I Rent My Home Out, Sell it & Reinvest in Other Rentals, or Trade Up?”

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With the current real estate market increase, I have been seeing more and more people trade up on their primary home. But what if you are fortunate enough to consider keeping your existing primary home while trading up? Here are some common questions that we come across:

  • Does it make sense to keep the old primary home as a rental?
  • Does it make sense to sell it and re-invest in other rental properties?
  • Does it make sense to simply sell the property and put more as a down-payment on the replacement home?

As usual, the answer will vary depending on your unique situation. Here are some of the things to consider when making this important decision.

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Sell to Pay Down the Loan on the New Primary Home

The Good

This can potentially be a great idea if you are someone who is looking to lower your debt. By selling your old home and putting more money down on your new home, you can potentially lower your future monthly payment and save on some interest costs.

If you have lived in that house as your primary home at least 2 out of the last 5 years, you can also potentially take advantage of the $250k/$500k capital gains exclusion on the tax side. For example, if you are a single person and you are eligible for this exclusion, you can save up to $37,500 of capital gains taxes this year on the sale of your old primary home.

Related: 19 Smart Tips to Help Sell or Rent Your Property — No Matter the Price Point

The Bad

The potential downside of this is that you will have no cash flow from this money when it is used to pay down debt on your primary home. Also, with a lower debt and lower interest expense, that could mean less to deduct on your tax returns come April tax time.

Sell to Re-Invest in a New Rental

The Good

A lot of times it can make sense to sell your primary home and take part or all of the money to buy an investment property. If the numbers do not work when you look at keeping that old home as a rental because of rents in the area, it can make sense to re-position that equity into other rental markets in-state or even out-of-state so that the money can be put to work for you. The upside is that now you can potentially have another stream of rental income when you reposition that money into an investment property.

The Bad

The potential downside is that this can mean you are taking on more debt overall by having debt on your new primary home and new debt on the new investment property.

For this route, make sure that you analyze the numbers to take into consideration the costs of selling your home and costs of acquiring your new investment property.

Turning the Old Primary Into a Rental Property

The Good

Depending on the situation, it can potentially be a smart move to turn your current primary home into a rental property. One of the benefits is that you can potentially save on selling and buying costs when you turn your home into a rental versus selling it and buying a different investment property. There can be some tax advantages to turning your primary home into a rental as well in appreciating markets. Here is an example of how someone was able to use their primary home to get tax-free gains from the IRS.

Let’s say you bought your home 10 years ago for $150k, and now it is worth $200k. Let’s also assume that the property can generate great monthly rental income and you also expect the property to appreciate more in value over the next 2 years. If you hold on to the property as a rental and then decided to sell 2 years later when the property is worth $250k, then you can potentially exclude the entire gain from taxes. We will take depreciation out of this scenario just to keep things simple.

$250,000 Sales Price

($150,000) Purchase Price

$100,000 Gains

Since this property was used as your primary home at least 2 out of the 5 preceding years, you can exclude up to $100k of the gain from taxes saving roughly $15k in tax dollars. Not a bad deal for locking in some tax-free money, right?

Related: Plan to Sell Your Primary Residence? STOP… And Consider This First.

The Bad

Potential downside of keeping this old home as a rental property is that you have less down payment toward your new primary home. Other potential downsides are the work needed to own a rental property. Last but not least, even though real estate has been doing well, there is no guarantee that it will continue to appreciate in the future. As such, by keeping this property you may end up selling it for less down the road.

With rises in home values and currently low interest rates, there are great moves to be made with real estate. Be sure to consult with your advisory team and weigh all your options to ensure that you are taking full advantage of this real estate climate.

Which of these options do you prefer? What routes have you taken before?

Let us know your take with a comment!

About Author

Amanda Han

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

4 Comments

  1. Robert Easter

    You forget a very overlooked option here…

    OWNER FINANCE A SALE of the Home…Ask for a $4000 signers fee at Closing Buyers usually never balk at this since they didn’t have the hassle of finding a mortgage lender

    PROS
    1. Produces Cashflow month to month for an extended period similar to Rental income but returning portion of Principle and interest..Interest is taxable. Principle goes against the Cost basis remaining on the property and is not taxable until remainder of the cost basis is drawn down.
    2. Eliminates the liability of owning the property, i.e. no fixing plumbing and electric issues midnight phone calls etc etc.
    3. Defers Tax liability of Capital gains on the property until the cost basis is recovered… and even then is maxed on an annual basis by the amount paid on the mortgage for that year thus reducing over all capital gains taxation annually
    4. Over the life of the mortgage the owner financing option will pay you nearly double the value in the in the property in interest than if you straight out sold the property. Thereby you created Cash out of thin air.

    Cons:

    1. Foreclosure:

    If borrowers default and the property has to be repossessed OH.. darn you get the property back and can re-sell it…again. Sure it can be expensive but that adds to the cost basis is.. cost of Doing business and you’ll get the property back eventually..

    However, as part of the Mortgage agreement make sure you wrap …
    1. Property taxes into the monthly payments
    2. In locals where applicable the Monthly utilities that are billed via the local county cities like water/sewer.

    This way Property taxes and municipal utilities are paid up through when the borrower begins missing payments and you are not surprised during foreclosure process that the Borrower had not paid Property taxes for the last five years

  2. Deanna Opgenort

    Here in CA a big consideration is property taxes.
    If you purchased a home 20 years ago your property taxes are based on the original purchase price, NOT the current value — needless to say there is usually a pretty big difference. 1% of $180k is a whole lot different than 1% of $550k (if you inherit or transfer within family even better — taxes are based on the ORIGINAL purchase price, not the value at time of transfer).
    If you purchased in 2008, not so lucky. 2010, lucky! You are probably paying .5-.7% taxes on it’s current value, even with the 2% allowable increase in assessed value.

  3. I happen to be in the middle of this decision now, and one advantage swaying me to rent out my first home is that it is a great opportunity for me to get my feet wet as a first time REI and see if landlording is really right for me.
    I’ve been considering entering the business for a year or two, but now I can give it a trial run with minimal upfront investment costs, and can sell in 2 years if I don’t like it and still take advantage of the capital gains exclusion.

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