Author Topic: quick sell or rent for one year?  (Read 995 times)

nereo

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quick sell or rent for one year?
« on: March 11, 2018, 02:45:26 PM »
Synopsis:
A new job in a new town 4 hours away has us leaving our city condo sooner than expected. We've been operating under the assumptions that we'd put it on the market in May and hope it sells within a few months.  Recently we found potential tenants who we know and trust that would move in the week we move out  - giving us another year (possibly two) until we put the apartment on the market.

Question:
Would renting it out for 1 year be a terribly idea? I know the math isn't great for a rental but I've listed the two primary reasons why I'm considering it below.

Facts and Figures:
PITI = $1205/mo ($650/$305/$190/$60).  Rent = $1250. $147k remaining on a $198k note @ 2.4% We'd cashflow each month renting at that price, but just barely. The condo is part of a co-propriety with several $k in reserve after redoing the roof and exterior, so there's no upcoming issues and we have the building fund to deal with the unexpected. List price would probably be $285k if we listed it this year, perhaps a lot more next year (see below).

Why consider when this is clearly not an 'ideal' rental?
A few reasons - 1) with the new job we have less time to sell now than we'd like (there's one major home-reno project I don't have time to finish now, but I would next year); 2) there's a bunch of recent and major development in our neighrborhood, which I think might increase the value & desireability of our condo considerably. This includes a new fancy-pants grocery store in walking distance, two sets of luxury condos with higher list prices and the completion of a new mass-transit hub. 3) We're changing the way our condo is structured.  It's complicated and won't go into effect until November, but once complete its new status on average increases the value by several thousand dollars.

Reasons I should just sell it
Clearly this is not a rental I would take on if it wasn't my existing primary residence (rent is way too low and sale price is way too high). Take the money and run. An economic crash might mean the increased value in this neighborhood might not play out as anticipated.

thoughts?
« Last Edit: March 11, 2018, 02:47:30 PM by nereo »

FatFI2025

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Re: quick sell or rent for one year?
« Reply #1 on: March 11, 2018, 03:33:39 PM »
Keep it if you can afford the negative cashflow. It will be negative because you have no allowance for costs beyond PITI. I've had two HCOL, negative CF properties that have worked out well as investments, but only because I was tactically and emotionally prepared for big loss years. I think HCOL, neg CF investment is a legit investment option but it is not mustachian since it increases your monthly obligations and clamps down on your financial freedom until the investment is liquidated.

Also, you can't really plan on just a year since the market could dip then and you wouldn't want to sell. If you hold on to it, you should be prepared to hold indefinitely (I think five years would be the max needed to wait out a cycle). Good luck!

FINate

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Re: quick sell or rent for one year?
« Reply #2 on: March 11, 2018, 05:38:08 PM »
Cash flow is zero, maybe a tiny bit positive if nothing breaks and no vacancy and no surprises with co-property repairs. In return for zero cash flow you get the risks and headaches of being a landlord, and perhaps several thousand dollars of increase value from the structure change and neighborhood development. But I think these bets are speculative at best, may not materialize, may also negatively impact you (e.g. lots of new supply hitting the market).

Also, assuming the condo has had good appreciation since purchase, converting it to a rental will reduce your home sale exclusion and/or result in depreciation clawbacks when you sell. Depending on how long you've owned it, this could mean many thousands of dollars in increased taxes.

If you've lived there more than 2 of the past 5 years and the condo has appreciated a lot, then I would sell and pocket the cap gains free of taxes.

[This assumes you're in the US whereas you may be in Canada? I think Canada has something similar, a "principal residence exemption," so check your laws to see how renting for a year affects your tax situation.]

 

FINate

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Re: quick sell or rent for one year?
« Reply #3 on: March 11, 2018, 06:32:04 PM »
I would hang onto it assuming the upcoming transit hub opening hasn't already increased market prices to their new level (it may have ).

As a US married couple, you'll get the full 500k capital gains exclusion on your primary residence as long as you sell within 5 years (assuming you have owned it for at least 2).  Not sure how Canada taxes things, but that is a pretty significant benefit and worth deferring the sale, in my opinion, to see how the market plays out.

I just looked into this for a rental I own, though in this case making a rental into a primary residence. Either way, you don't get the full 500k exclusion if the property as been rented. See Worksheet 3 of IRS Publication 523 (https://www.irs.gov/publications/p523). Basically, exclusion and depreciation clawback get prorated based on the number of days you lived there vs. rented. As far as I can tell Canada has something similar.

nereo

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Re: quick sell or rent for one year?
« Reply #4 on: March 12, 2018, 05:58:16 AM »
The unit is in Canada, while we are in the US.  Going to need to dig into the tax implications a bit more, but as I understand it the US tax requirements won't apply here, and rental income is decalred under the foreign income exclusion.  Hmm... some more research to clear this up.
Thanks for the feedback so far.

kenmoremmm

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Re: quick sell or rent for one year?
« Reply #5 on: March 12, 2018, 08:09:12 AM »
I would hang onto it assuming the upcoming transit hub opening hasn't already increased market prices to their new level (it may have ).

As a US married couple, you'll get the full 500k capital gains exclusion on your primary residence as long as you sell within 5 years (assuming you have owned it for at least 2).  Not sure how Canada taxes things, but that is a pretty significant benefit and worth deferring the sale, in my opinion, to see how the market plays out.

I just looked into this for a rental I own, though in this case making a rental into a primary residence. Either way, you don't get the full 500k exclusion if the property as been rented. See Worksheet 3 of IRS Publication 523 (https://www.irs.gov/publications/p523). Basically, exclusion and depreciation clawback get prorated based on the number of days you lived there vs. rented. As far as I can tell Canada has something similar.

i don't know for sure, but i believe the 2 in 5 exclusion still applies to properties purchased prior to 2007 or 2008. the IRS changed it then to be a prorated approach.

FINate

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Re: quick sell or rent for one year?
« Reply #6 on: March 12, 2018, 08:37:00 AM »
I would hang onto it assuming the upcoming transit hub opening hasn't already increased market prices to their new level (it may have ).

As a US married couple, you'll get the full 500k capital gains exclusion on your primary residence as long as you sell within 5 years (assuming you have owned it for at least 2).  Not sure how Canada taxes things, but that is a pretty significant benefit and worth deferring the sale, in my opinion, to see how the market plays out.

I just looked into this for a rental I own, though in this case making a rental into a primary residence. Either way, you don't get the full 500k exclusion if the property as been rented. See Worksheet 3 of IRS Publication 523 (https://www.irs.gov/publications/p523). Basically, exclusion and depreciation clawback get prorated based on the number of days you lived there vs. rented. As far as I can tell Canada has something similar.

i don't know for sure, but i believe the 2 in 5 exclusion still applies to properties purchased prior to 2007 or 2008. the IRS changed it then to be a prorated approach.

As far as I can tell from Pub 523 it's a matter of how many days of non-use as primary residence after 2008 rather than purchase date.

nereo

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Re: quick sell or rent for one year?
« Reply #7 on: March 12, 2018, 08:39:16 AM »

i don't know for sure, but i believe the 2 in 5 exclusion still applies to properties purchased prior to 2007 or 2008. the IRS changed it then to be a prorated approach.

The property was purchased in 2012, and it has been our residence for the last 6+ years. Still not 100% certain the IRS rules apply to properties purchased outside the US (will look into that) but assuming they do we won't hit by the 2 in 5 exclusion. 

Regarding Canada, we do not pay any CG if the property is sold while it is our permanent residence (i.e. in 2018).  If we change it to a rental then we pay CG, but only from the fair market value at the time we change it until the time we sell it (e.g. from 2018 to 2019).  Given that our taxable income in Canada will be negligible, the tax burden should be low-to-nonexistent.
If others have experience in this arena please chime in - this is my understanding based on the info online from Revenue Canada.
source

robartsd

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Re: quick sell or rent for one year?
« Reply #8 on: March 12, 2018, 09:14:22 AM »
As far as I can tell from Pub 523 it's a matter of how many days of non-use as primary residence after 2008 rather than purchase date.
Yes, but I believe there is an exemption for some rental use that occurs after you last used the home as a primary residence and the sale of the home. I think the limit is two years of rental use after you last used the home as your primary residence. I'm pretty sure that one year of rental use will not impact their capital gains exemptions (as long as they don't move back to to the condo before selling).