Need input on whether to keep an underwater rental property or sell

[mpresco]

Hi all- I'd appreciate some input on deciding the future of my rental property. The rental is a 2 bd 2 bath, low maintenance single family home that was previously my residence. I have been renting it out for 1.5 years with good tenants. they will be moving out this summer so I'm going through the decision making process a bit early as to whether to continue to rent or sell.

Here are the details:

Principal owed: 170,000
Current value: 160,000
Monthly Rent: 1,100
monthly payment (PITI + MIP) 1,309
Mortgage APR: 4.75
Annual Taxes and HOA: 2,400

We can easily afford the negative cash flow, but not sure if it is preferable to lose a little each month in the hope that the value increases or whether to sell now and be done with it. I'd guess we'd need to bring 25k or so to the table at close if we were to sell it this summer.

Thoughts?

[OzzieandHarriet]

I may be wrong, but: If you sell it later, even if you sell at a loss, you will owe capital gains tax if you have depreciated the property (i.e., taken all the deductions you are legally entitled to) on your taxes. The IRS gives you 2 years to rent without having to pay this tax, so if you sell before 2 years of renting is up, this will not be an issue.

So basically, you may owe more money than you will if you sell now, even if the property appreciates. Check the IRS website or consult a tax expert to make sure.

[CaptainCalf]

I may be wrong, but: If you sell it later, even if you sell at a loss, you will owe capital gains tax if you have depreciated the property (i.e., taken all the deductions you are legally entitled to) on your taxes. The IRS gives you 2 years to rent without having to pay this tax, so if you sell before 2 years of renting is up, this will not be an issue.

So basically, you may owe more money than you will if you sell now, even if the property appreciates. Check the IRS website or consult a tax expert to make sure.

+1 as an investor I'm much rather buy a property with a tenant then one without...GLWS!

[mpresco]

Thanks for the input. I'm leaning towards selling mainly due to the fact that I wouldn't likely buy the property as an investment right now if I didn't already own it... As far as capital gains exclusion, I think the rule is that it must be a principal residence for 2 of the last 5 years in order to be excluded from capital gains. I guess the big question is pay now or pay later.

[tryan]

Sorry for your loss .... no need to worry about capitol gains (there are none).

I would bleed a little slowly and hope we are moving UP.  FWIW I carried a negative cashflow, upside down property for 12 years.  Once it turned right side up we dumped.  Make that mistake ONCE ... you'll NEVER make it again.  Everything there after cashflowed positive the day it was purchased.

[marblejane]

It mostly depends on 1) how rapidly the market around the property is appreciating and 2) your tolerance for risk. Personally, I'd dump it and move on.