Tempted to sell out of landlording in San Marcos

User Forum Topic
Submitted by ldub818 on May 19, 2016 - 3:11pm

So I bought a condo/townhouse in the Magnolia at Old Creek Ranch complex (Melrose and Rancho Santa Fe Road) back in 2013 for $345k, put enough down that the renters are covering my costs plus a little extra. So far it's been a nice supplemental investment play (we max our retirement accounts so we were looking for another avenue). But lately the prices have been moving up at a bit of a clip, latest comps are $450-$460k. While that's not enough to make the transaction costs and capital gains taxes worth it for me, it's now not far off from us being able to sell and pay off our primary home and just call it good. I won't bore you with our life story and I know about real estate exchange to avoid taxes, we are just thinking of simplifying to prepare the glide path for retirement (early 40's looking to retire early 50's). Do you all think we are safe to hold the rental for another year?

Submitted by no_such_reality on May 19, 2016 - 3:23pm.

So if prices go up to around $500k, you're thinking your best investment is to sell, take the 7-8% hit on selling fees, take the 29.3% tax hit on the cap gain and then paying of the remaining home loan that is finance at probably 4% or less?

Submitted by The-Shoveler on May 19, 2016 - 3:35pm.

It depends.

If you just want to be done with LL'ing (or a particular property/investment etc...) then now may not be a bad time to get out.

No one knows what will happen next year, but in ten years....

Who knows maybe you would want the income.

Submitted by ldub818 on May 19, 2016 - 4:40pm.

So this is what I'm trying to understand, why is it 29.3% vs. long term capital gains tax? I've just started exploring this, but I read 15% or 25% depending on depreciation claw back.

Submitted by La Jolla Renter on May 19, 2016 - 5:07pm.

Do you have kids that could live there someday? A good reason to keep it.

If you can afford to retire that well off in your early 50's. Then 50k net profit here or there shouldn't be much of an issue.

Why not hold it for 10 years.

Submitted by no_such_reality on May 19, 2016 - 5:31pm.

The long term rate would either be 15% or 20% depending if the $100K pushes you over the $400K taxable income

California will tax it as income which you are most likely 9.3%.

So effective something like 24.3 or 29.3. Not including any other tax hits /credit reductions the increase AGI may cause.

Submitted by ldub818 on May 20, 2016 - 4:58pm.

Thanks for the explanations everyone. I appreciate the thoughtful responses. I'm going to meet with my tax person to discuss. We make $300-310k combined so looks like there are lots of pitfalls to watch out for. A little bummed right now - I know, 1st world problems.

Submitted by plm on May 20, 2016 - 5:53pm.

I want to sell my rental too but not because I think the property value will go down, its just a pain to take care of renting it out.

But as you will probably find out from your tax person, you are going to see a big tax hit. I calculated mine to be 23.8 just for federal. 20 for long term cap gains + 3.8 for medicare. Hopefully I'm wrong since I'm not a tax professional. But it really didn't make much financial sense to sell in my case. Yeah, 1st world problems.

Submitted by HLS on May 20, 2016 - 9:08pm.

Obviously I don't have your numbers, but I would consider refinancing your primary to a new 30yr up to $417K, taking cash out and paying off the rental.
(Rather than selling the rental, paying taxes on profit
and paying off primary)

I don't get the concept that retirement means having no mortgage payment. Creating income works well for many.

Equity doesn't earn anybody much.
Not a concept for everyone, but I've seen this work miracles for some who didn't think they had cash flow options.

Submitted by no_such_reality on May 21, 2016 - 8:36am.

Actually HLS, why not the other way. Refi the rental, strip the equity,may off the primary and put all the risk into the rental were if something happens on the income front the only thing with the lien is the rental?

A lot of people like the free and clear primary so they don't worry about an aggressive foreclosure or the perceived cash drain in retirement.

Submitted by HLS on May 21, 2016 - 8:47am.

Refinancing a primary is less expensive than a rental.
Either way you end up with the same amount of debt.
It's the cheapest mortgage money you can get.

Historically, a very small % of people with moderate net worth++ end up in trouble/foreclosure.

Seek a tax professional for tax aspects.
Many people forget about the standard deduction when figuring Itemizing Deductions... The larger your household, the less sense it makes to itemize.

Being a landlord isn't for everyone, but if you believe that property values will increase, I would think that owning 2 properties with some debt is better than owning one free and clear.

Having hundreds of thousands of dollars (or millions) of equity but not being able to enjoy your life is pointless to me.
Your heirs will appreciate it !

It's a different perspective than some who want to pay everything off and have no debt later in life..
I've known people who died young with lots of equity and others whose health declined that their golden years weren't so golden,,, But they had no debt, little cash and lots of equity.

Submitted by ltsddd on May 21, 2016 - 9:00am.

.

Submitted by Coronita on May 21, 2016 - 9:23am.

no_such_reality wrote:
Actually HLS, why not the other way. Refi the rental, strip the equity,may off the primary and put all the risk into the rental were if something happens on the income front the only thing with the lien is the rental?

A lot of people like the free and clear primary so they don't worry about an aggressive foreclosure or the perceived cash drain in retirement.

Fyi...slightly related ...You can't cash out-refi a rental and then deduct the mortgage interest on the amount you cashed out against your rental... unless you use the equity you took out to improve the property or to buy another investment. In the last scenario, you would deduct the mortgage interest as an investment expense on the new investment. Of course , some people cheat on their taxes probably. But I wouldn't recommend it since if you get caught your would be in deep shit.

So you would lose your mortgage interest deduction on both your primary (no with no loan) and your rental I think.

Also, a rental you are probably paying 1/4 percentage higher on the loan, and some rentals cannot be easily refinanced or even qualify to get a loan especially if it's an attached community with less then 50% own occupancy.

Submitted by La Jolla Renter on May 21, 2016 - 9:14am.

HLS and no_such_reality, great points.

Lots of strategies with a rental down the road.

1031 exchange it into your ultimate retirement home.

20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.

The rental strategies are numerous, but the landlord game is not for everyone. It really only works well if your a shrewd businessman, a good handyman, or lucky. Lucky being great tenants or big appreciation.

Submitted by ltsddd on May 21, 2016 - 9:39am.

La Jolla Renter wrote:

20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.

This loophole has been closed with the Housing Assistance Tax Act of 2008. Essentially, value appreciation while the property is a rental is subjected to capital gains tax.

Submitted by HLS on May 21, 2016 - 10:16am.

There are tax aspects to consider and there's some expert advice available here but that's not my expertise.

30+ years ago I had a wealthy client who explained to me that he was a member of a group of wealthy guys, who really were wealthy. They had high net worth and lived well, but many had no 'cash'
It was tied up in investments & tax shelters(in the 80's)

It didn't make sense at the time but over the years I've fine tuned strategies for myself and clients that have worked well.

There's a time in life to take risks and there's a time in life that you want to be more conservative.
Sometimes a person in one stage is trying to give the other stage advice and it's inappropriate.

I've learned that having cash is not important as long as you have ACCESS to cash if you need it.

IMO there's nothing wrong with manageable debt and dependable income streams to support.
I'd rather have cash flow and income throughout life to enjoy, rather than knowing I could have huge income
10 or 20 years from now.

To just stubbornly say that 'I want no debt at retirement' and not explore alternatives, is foolish.

If I could borrow money at 3.5% and earn 5%+ on it,
I'd be happy to be in 'debt' for the rest of my life.

If I had a 401K AND a mortgage AND a secure job,
I would max out a 401K loan and pay down/off my mortgage.

I think the entire 401K system is a ticking time bomb and a huge threat to the world economy, far bigger than the
housing bubble of yesteryear.

Submitted by Coronita on May 21, 2016 - 12:34pm.

ltsdd wrote:
La Jolla Renter wrote:

20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.

This loophole has been closed with the Housing Assistance Tax Act of 2008. Essentially, value appreciation while the property is a rental is subjected to capital gains tax.

Funny you should mention this because I as just talking about this with others and was deciding whether to discuss it here, since most of the posts now on Piggington aren't finance or re related, so I thought it would be a moot point to discuss and brainstorm... But now that you brought it up. Based on my initial research, converting a rental back to a primary and then subsequently selling the primary will result in the following tax consequences.

1) you end up paying of depreciation recapture on your first rental and any portion of your new home that was briefly a rental

2) your taxable capital gains ends up being prorated based on number of years both properties were rental / number of years your exchanged home is a primary, subject to a 5 year requirement which I won't discuss here. The longer you use the property as a primary, the less the taxable amount on the cap gains.

So for example if you had a rental for 4 years and 1031 exchanged to a home was rental for 2 years and then converted it to a primary home and used it as a primary for 10years. When you sell it, if you had a $250k capital gains from it, 6/16th of that would be taxable at your capital gains tax rate. 10/16th of it would be tax free...I think... again i just started researching this now.

And, there would be no tax consequences if you don't sell you new primary.

I think there are also a lot of benefits regarding step-up cost basis when you die and your kids inherit the property, but I haven't finished that research yet ( I believe both capital gains a depreciation recapture both get wiped out as part of your kids inheriting your estate, but not 100% certain, as I haven't gone researching there yet)

Submitted by HLS on May 21, 2016 - 12:46pm.

I think spouses get stepped up basis also..
Have heard several stories from the Bay area..
Spouses don't usually die together before kids get it.

Houses bought 50 years ago for $50,000, worth $2M today,
Husbands were sick. Told wives to sell the house after he died... limited (or no?) income tax owed because of stepped up basis ???

Submitted by no_such_reality on May 22, 2016 - 7:23am.

Good point about the interest deduction flu on the rental.

For some there's great comfort in paying off therimary. I also agree with HLS reasonable debt at reasonable rates is prudent as long as you don't gamble.

You can lock up your money in equity or use it as the down payment for a small apartment building in a nearby state with a 7-10% cap rate.

Submitted by Coronita on May 22, 2016 - 8:09am.

no_such_reality wrote:
Good point about the interest deduction flu on the rental.

For some there's great comfort in paying off therimary. I also agree with HLS reasonable debt at reasonable rates is prudent as long as you don't gamble.

You can lock up your money in equity or use it as the down payment for a small apartment building in a nearby state with a 7-10% cap rate.

I totally agree. If you are able to pay off your primary and have sufficient reserves left over to pay for other things in retirement, you really can't go wrong with the approach you take, and its a matter of personal preference imho. The key I think is as you head into retirement to try to pin your living costs and make them as fixed and consistent as possible. Fixed mortgages can do that if your income streams are more or less fixed. Or if you don't want to deal with the pita factor of tenants, perhaps sell or 1031 exchange into a primary. I am trying to figure this out so who knows what strategy is optimal. I think I am just trying not to majorly screw this up.

The other thing about being old and retiring is if you sell and buy another property of equal or greater value, you can keep your old property tax rate. So if you had your primary since 1980 like my parents did, then your total property tax on a very nice single family home is probably less than 2 months of rent people pay on a 2 bedroom condo. And I believe if your kids end up inheriting those properties, that property tax rate continues. Prop 13 is just great. That probably is also one of the reasons housing inventory is staying low. Net of doing a house exchange is doing nothing to the inventory.

Submitted by svelte on May 22, 2016 - 7:56am.

ltsdd wrote:
La Jolla Renter wrote:

20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.

This loophole has been closed with the Housing Assistance Tax Act of 2008. Essentially, value appreciation while the property is a rental is subjected to capital gains tax.

This points out the folly in making multi-decade financial decisions based on current tax law.

Tax laws change.

Submitted by Coronita on May 22, 2016 - 8:15am.

One bad thing about paying of a primary.... I am finding I am having less financial discipline these days.

I use to do a much better job budgeting things. Now, there's less motivation to cut things so close. Or spend the time to figure out the most optimal way to save on X. I don't know if that is a good or bad thing. I just call it how it is.

Submitted by HLS on May 22, 2016 - 2:15pm.

flu wrote:
One bad thing about paying of a primary.... I am finding I am having less financial discipline these days.

I use to do a much better job budgeting things. Now, there's less motivation to cut things so close. Or spend the time to figure out the most optimal way to save on X. I don't know if that is a good or bad thing. I just call it how it is.

Are you enjoying your life more OR less now ??
(more relaxed/less stress?)

The transaction of paying off your primary did not make you less disciplined;
Your feelings about your situation have made you less disciplined.

**Your feelings about this could change at any time; and that's OK.

Submitted by Coronita on May 22, 2016 - 2:36pm.

HLS wrote:
flu wrote:
One bad thing about paying of a primary.... I am finding I am having less financial discipline these days.

I use to do a much better job budgeting things. Now, there's less motivation to cut things so close. Or spend the time to figure out the most optimal way to save on X. I don't know if that is a good or bad thing. I just call it how it is.

Are you enjoying your life more OR less now ??
(more relaxed/less stress?)

The transaction of paying off your primary did not make you less disciplined;
Your feelings about your situation have made you less disciplined.

**Your feelings about this could change at any time; and that's OK.

I guess I feel I can enjoy life more because I don't need to be as careful of where my money goes. (I'm not burning through it, just less anal about it).

I don't know if that's good or bad.

Submitted by scaredyclassic on May 22, 2016 - 3:06pm.

GUILDENSTERN
Prison, my lord?
HAMLET
Denmark’s a prison.
ROSENCRANTZ
Then is the world one.
HAMLET
A goodly one, in which there are many confines, wards, and dungeons, Denmark being one o' th' worst.
ROSENCRANTZ
We think not so, my lord.

HAMLET
Why, then, ’tis none to you, for there is nothing either good or bad, but thinking makes it so. To me it is a prison.

ROSENCRANTZ
Why then, your ambition makes it one. 'Tis too narrow for your mind.
HAMLET
O God, I could be bounded in a nutshell and count myself a king of infinite space, were it not that I have bad dreams.
GUILDENSTERN
Which dreams indeed are ambition, for the very substance of the ambitious is merely the shadow of a dream.
HAMLET
245A dream itself is but a shadow.
ROSENCRANTZ
Truly, and I hold ambition of so airy and light a quality that it is but a shadow’s shadow.
HAMLET
Then are our beggars bodies, and our monarchs and outstretched heroes the

Submitted by HLS on May 22, 2016 - 3:24pm.

FLU
If you can recognize and admit to enjoying life more,
isn't that a good thing ??

I can share plenty of discussions I've had with
senior homeowners about reverse mortgages
(I don't like them; only a last resort)
Most were similar..
a) They were in a rush to have no 'debt' so they paid off their house. They have no debt, but very little cash to live off & enjoy life. Only option today is a reverse mtg.
They can no longer qualify to refi for a conventional cash out loan.

b) Others had lots of equity but no cash. They didn't sleep well because they had no money and worried about paying bills and enjoying life.

Ive never met anyone who had money in the bank/cash cushion that didn't sleep well even though they had a mortgage.

Many seniors are just getting by. It's hard to imagine when you only know 'wealthy' people. Not everyone collects SS or gets much.
The heirs of people with no mortgage will be the winners, and many of them deprived themselves of enjoying life.

Of course there is a price to pay to have some debt, but you cannot understand the feelings that some people have about their situation.
There's a price to pay to have no debt as well; not always financial.

Submitted by Coronita on May 22, 2016 - 3:43pm.

HLS wrote:
FLU
If you can recognize and admit to enjoying life more,
isn't that a good thing ??

I can share plenty of discussions I've had with
senior homeowners about reverse mortgages
(I don't like them; only a last resort)
Most were similar..
a) They were in a rush to have no 'debt' so they paid off their house. They have no debt, but very little cash to live off & enjoy life. Only option today is a reverse mtg.
They can no longer qualify to refi for a conventional cash out loan.

b) Others had lots of equity but no cash. They didn't sleep well because they had no money and worried about paying bills and enjoying life.

Ive never met anyone who had money in the bank/cash cushion that didn't sleep well even though they had a mortgage.

Many seniors are just getting by. It's hard to imagine when you only know 'wealthy' people. Not everyone collects SS or gets much.
The heirs of people with no mortgage will be the winners, and many of them deprived themselves of enjoying life.

Of course there is a price to pay to have some debt, but you cannot understand the feelings that some people have about their situation.
There's a price to pay to have no debt as well; not always financial.

I agree that being house rich and cash poor isn't necessarily a good thing heading into a retirement. As long as "income in" is more than "expenses out", and "income in" and "expenses out" are relatively stable, that's what matters to me. I'm just trying to set my required "income in" at a minimum wage job, just in case. But even then, it might not that be that bad. Afterall, I hear that minimum wage will now be $15/hour.. Awesome. :)

Submitted by Coronita on May 22, 2016 - 3:53pm.

The only thing though is college expense. Hopefully, our budgets for that is sufficient. Part of that will come out of a well funded 529 account that clobbered most of my other account's performance, a custodial account that's been religiously gifted to annually, and if necessary selling of a rental property if necessarily at that point. I figure that should take the little kiddie through med-school (if that's going to happen) heh heh.

Of course, we can always try to get into a UC school, pay in-state tuition, and piss off people that think paying in state tuition costs CA taxpayers a lot because of the reduced tuition, especially if the student is chinese,lol.

Submitted by flyer on May 22, 2016 - 4:02pm.

Having what you want and little debt is a great feeling, and our family has always pretty much taken that path, but never at the "cost" of being cash poor, so I completely agree with this discussion.

Although I know there's an ongoing discussion about Prop 13 being repealed in some form, it has definitely been very helpful to many of us over the
years--especially the older members of the family--but it will be interesting to see how things go in the future.

Submitted by bearishgurl on May 22, 2016 - 4:13pm.

flu wrote:
no_such_reality wrote:
Good point about the interest deduction flu on the rental.

For some there's great comfort in paying off therimary. I also agree with HLS reasonable debt at reasonable rates is prudent as long as you don't gamble.

You can lock up your money in equity or use it as the down payment for a small apartment building in a nearby state with a 7-10% cap rate.

I totally agree. If you are able to pay off your primary and have sufficient reserves left over to pay for other things in retirement, you really can't go wrong with the approach you take, and its a matter of personal preference imho. The key I think is as you head into retirement to try to pin your living costs and make them as fixed and consistent as possible. Fixed mortgages can do that if your income streams are more or less fixed. Or if you don't want to deal with the pita factor of tenants, perhaps sell or 1031 exchange into a primary. I am trying to figure this out so who knows what strategy is optimal. I think I am just trying not to majorly screw this up.

The other thing about being old and retiring is if you sell and buy another property of equal or greater value, you can keep your old property tax rate. So if you had your primary since 1980 like my parents did, then your total property tax on a very nice single family home is probably less than 2 months of rent people pay on a 2 bedroom condo. And I believe if your kids end up inheriting those properties, that property tax rate continues. Prop 13 is just great. That probably is also one of the reasons housing inventory is staying low. Net of doing a house exchange is doing nothing to the inventory.

Replied to here:

http://piggington.com/recommendation_15_...

Submitted by no_such_reality on May 23, 2016 - 3:51pm.

flu wrote:
The only thing though is college expense. Hopefully, our budgets for that is sufficient. Part of that will come out of a well funded 529 account that clobbered most of my other account's performance, a custodial account that's been religiously gifted to annually, and if necessary selling of a rental property if necessarily at that point. I figure that should take the little kiddie through med-school (if that's going to happen) heh heh.

Of course, we can always try to get into a UC school, pay in-state tuition, and piss off people that think paying in state tuition costs CA taxpayers a lot because of the reduced tuition, especially if the student is chinese,lol.

This is were Cali shines, the UC system is outrageously inexpensive. Seriously, $15K for UCLA or Berkeley , or UCI, or Merced, or any other versus $50K for Georgetown, Dartmouth, Cornell, Brown, Carnegie Mellon, just list any top ranking.

The Cal State system runs half the UC system.

The rest of the expense, is what it costs to live in Cali and frankly, it's cheaper living as a college kid here than living as a young adult working.

IMO, a kid going to UCI is going to fork out close to $32K to live on campus and get an education. That same kid if he was working in Orange County is going to have to probably shell out $32K to live and work here.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.