Sell or Rent Decision

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Submitted by millennial on July 23, 2020 - 10:58am

Just purchased an investment property in Los Angeles from my uncle at a great price (~200K less than appraisal). Now the tough part, should I rent it out for a year and take advantage of a 1031, sell as is (make $200K but face short term capital gains), or fix it up and sell (potentially make more but still short term capital gains). At this point, I'm thinking of fixing it up slightly (remove popcorn ceilings, paint walls, and add laminate) and renting it out, so I can buy something closer to SD for my parents to rent in a year.

Any thoughts, or anything I should be considering?

Submitted by gzz on July 23, 2020 - 12:03pm.

If it is in poor shape, a light reno might not add much value since the next owner will do a full reno on top of anything you do.

It might also be worth more without a tenant if it needs a full reno. Sounds like this could be the case if it still has popcorn ceilings.

On this basis, another option is no reno and hire a company to AirBNB it for you, then sell after the capital gains become long term.

Personally I’d never pay STCG on real estate.

Submitted by millennial on July 23, 2020 - 3:49pm.

Thanks gzz,

I'm against STCG as well, but worried about the market and the possibility of a decline in housing values in a year outpacing the difference in taxes of capital gains. This being said, I've been worried about it since the Covid cycle and the market has been red hot. Open to the AirBnb option, but how would it work with 1031? Do you know it would satisfy rental rule?

Submitted by gzz on July 25, 2020 - 12:53pm.

The efficient market hypothesis suggests you should take the certain tax savings, not speculate you’ll get a better risk adjusted return selling the property and investing the cash elsewhere.

If the overall risk is too much, you can hedge it by shorting a REIT until you sell the property. If the property goes down, your short very likely profits.

Alternatively, you can pare back any long risk investments.

Sorry I don’t have any insight on 1031s.

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