Author Topic: House hacking a duplex, sell to put appreciation in index funds?  (Read 1646 times)

Sonos

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Question:
We currently own a duplex, live upstairs and rent the downstairs long term (we致e also successfully Airbnb弾d it). We bought the house about 5 years ago and in that time frame the value of the house has increased considerably. So much so that I think it might be better to extract that equity and invest it in index funds so we can access the cash flow sooner than if we keep house having.

Would it get us closer to FIRE is we sold our house and invested the proceeds in index funds and to buy a new house? Or is it better to keep our current situation of house hacking?

Option A: keep with current situation, house hacking:
Purchased duplex 5 years ago for $900,000

Stats for option A:
PITI is about $4,100 a month
We live upstairs.
Rent from downstairs unit is $2,000 a month
Stache is $400,000 (split across retirement and brokerage accounts)

Option B: sell duplex to access equity, thus super-sizing our stache, keeping PITI the same, but probably not replacing rental income:

House sale proceeds estimate:
Estimated sale price: $1,800,000
Mortgage balance: $570,000
覧覧覧覧覧覧覧覧
Proceeds from sale, gross: $1,230,000

Purchase price: $900,000
Remodel costs that raise cost basis: $250,000
Capital gains exclusion, for a couple: $500,000
覧覧覧覧覧覧覧覧
Tax-free portion of proceeds: $1,650,000

Taxable portion of proceeds: $150,000
15% capital gains tax cost: $22,500

Proceeds from house sale, net, = gross proceeds minus capital gains tax cost

$1,777,500 = $1,800,000 - 22,500

Cost to sell the house and move 10% of sale price: $180,000, but I think that痴 being generous/conservative, so I知 going to round down to $177,500 for an easy number.

Total proceeds = $1,600,000

Of the net proceeds, we can take $180,000 as a down payment on a new house. Even a fixer in our neighborhood is going to cost $1M easy, but let痴 say we find one for $900,000. Then we壇 take an additional $100,000 to fix that house up.

This leaves us with $1,320,000 left to invest. Add that to our existing $400,000 investment portfolio and it brings us to $1,720,000 invested.

Stats for option B:
PITI is about $4,100 a month (for a $900k house with the same interest rate we have on our current house, 3.875% 30 year)
We live in a single family house (no rental income)
Stache is $1,720,000 (split across retirement and brokerage accounts)


Option B seems better financially to me, even though we壇 miss out on $2k a month in rent, I think all that equity would do more for us in the market. Plus, I壇 prefer to live in a single family house, and think we are done with house hacking in terms of lifestyle (we are ready to not share a wall, or in this case a floor/ceiling).


Papa bear

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #1 on: October 27, 2019, 09:11:26 PM »
Option B.  The equity you have in that house greatly surpasses the 2k in rent. Like it痴 not even close here.

So. Option B.

And, your 500k exclusion, it痴 a 2 unit that was 1/2 rented. Only half of the property is your primary.  I would definitely get some tax advice, because you may not get the full 500 for just your living side.

And my god. 4k / month in imputed rent on a value of 1.8 million?  I致e got rentals that bring in that sort of cash, but I壇 probably get 450k on the place. Congrats on hitting the jackpot.


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Sonos

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #2 on: October 27, 2019, 09:26:12 PM »
Thanks for replying, Papa Bear.

Yes, the appreciation is big. It痴 kind of hard to wrap my head around it, so needed to run the numbers passed someone else.

You are correct on the tax exemption being less than the full $500k. Our upper unit is about 2/3 the house and the lower unit is about 1/3. We also haven稚 rented it out the entire time we致e owned it, so that all adds up to something less than $500k but more than $300k in tax exempt proceeds. I think the numbers still favor selling, though.
« Last Edit: October 27, 2019, 09:29:50 PM by Sonos »

Jon Bon

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #3 on: October 28, 2019, 11:59:02 AM »
Holy shit  you can fire in one fell swoop. Option B sell the house!

Your appreciation is fantastic, congratulations you have won. Time to cash that investment in and move on. your gonna make an insane amount of mostly tax free money. I dont know anything else, anywhere else that is going to perform nearly that well.

That being said yes your rental return is downright terrible. I have rental properties worth about ~400k or so producing ~4,000 in rent. So yes I would be happy to trade my house for yours! I will have my lawyers send over the paperwork random internet person. :)

Sell the house, quadruple your stashe and be happy.

dandarc

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #4 on: October 28, 2019, 12:29:34 PM »
Sell house, move somewhere where $1.5 million fires you immediately. This would very much be a "you've won - stop playing the game" move.

The rent needs another zero with this amount of capital tied up, so if you hold this property you're betting on appreciation, which obviously has worked out so far for you, but will the run continue?

If you really want to stay in this house, you could also cash-out refinance - would unlock a lot of the equity and doesn't involve moving.

sammybiker

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #5 on: October 28, 2019, 03:26:49 PM »
@Sonos  Nothing of value to add but nice fn buy, wow.  Just wow.

Actually, a thought...if you're digging the real estate game and wanted to 1031 the duplex into something larger?  I imagine that would put you out of state but you could still turn those gains into something that will cashflow. 

Whatever you decide, congrats on buying 5 years ago.  Go buy your RE agent a drink once this closes.

robartsd

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #6 on: October 28, 2019, 04:45:05 PM »
Question:
Stats for option A:
PITI is about $4,100 a month
Rent from downstairs unit is $2,000 a month
When I hear "duplex" I think, "two approximately equal units." If that's the case, you've been subsidizing your tenants and got lucky with appreciation. Cash out.

Purchase price: $900,000
Remodel costs that raise cost basis: $250,000
Capital gains exclusion, for a couple: $500,000
覧覧覧覧覧覧覧覧
Tax-free portion of proceeds: $1,650,000

Taxable portion of proceeds: $150,000
15% capital gains tax cost: $22,500
Doesn't the fact that you used part of the property for income complicate the capital gains exclusion (only the gains attributable to the portion of the property you used as your residence can be excluded)? You will also have depreciation recapture for the depreciation you could have claimed for the rental portion of the property (even if you failed to claim it).

elysianfields

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #7 on: October 29, 2019, 01:30:34 AM »
Purchase price: $900,000
Remodel costs that raise cost basis: $250,000
Capital gains exclusion, for a couple: $500,000
覧覧覧覧覧覧覧覧
Tax-free portion of proceeds: $1,650,000

Taxable portion of proceeds: $150,000
15% capital gains tax cost: $22,500
Doesn't the fact that you used part of the property for income complicate the capital gains exclusion (only the gains attributable to the portion of the property you used as your residence can be excluded)? You will also have depreciation recapture for the depreciation you could have claimed for the rental portion of the property (even if you failed to claim it).
[/quote]

That's my reading of the situation too.  You aren't selling a building, you're selling two units: a primary residence and a rental property.  If your primary residence had a $450k basis, you added $125k in remodeling (not sure whether those are a 50-50 split), and you sell it for $900k, you only can exclude $900k-($450k+125k)=$325k.  YMMV depending on how you can split the basis, remodeling costs, and sales price allocations.  Uncle Sam wants his cut.

Sonos

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #8 on: November 02, 2019, 02:22:53 AM »
Thank you all for the responses. I realized while reading them that I didn稚 think the numbers were THAT good and then I re-read my post and saw that I made a mistake in my math. After running this math many times on my own, of course I make a mistake when I write it up to post it!

First off, apologies for the mistake.

Second, the mistake. In my post, I calculate the capital gains taxes and deducted that from the sale price to come up with the net proceeds, but I forgot to also deduct the mortgage balance. I致e fixed that mistake below. This was a significant error on my part.

Thirdly, yes, the $500,000 capital gains exclusion would actually be more like 2/3 * $500,000 (since 1/3 of the house is the apartment that we rent out and we live in the other 2/3), which is $333,000.

So, here are the corrected numbers for option B:

Option B: sell duplex to access equity, thus super-sizing our stache, keeping PITI the same, but probably not replacing rental income:

House sale proceeds estimate:
Estimated sale price: $1,800,000
Mortgage balance: $570,000
覧覧覧覧覧覧覧覧
Proceeds from sale, gross: $1,230,000

Purchase price: $900,000
Remodel costs that raise cost basis: $250,000
Capital gains exclusion, for a couple: $500,000 * 2/3 the house = $333,333
覧覧覧覧覧覧覧覧
Amount of sale price that could potentially be tax-free : $1,483,333

Taxable portion of sale price: 1,800,000 - 1,483,333 = $316,667
15% capital gains tax applied to $316,667: $47,500

Proceeds from house sale, net, = sale price minus capital gains tax cost minus mortgage balance

$1,182,500 = $1,800,000 - $47,500 - $570,000

Cost to sell the house and move 10% of sale price: $118,250 but I think that痴 being generous/conservative, so I知 going to round down to $110,000 for an easy number.

Total net proceeds = $1,072,500

Of the net proceeds, we can take $180,000 as a down payment on a new house. Even a fixer in our neighborhood is going to cost $1M easy, but let痴 say we find one for $900,000. Then we壇 take an additional $100,000 to fix that house up.

This leaves us with $792,500 left to invest. Add that to our existing $400,000 investment portfolio and it brings us to $1,192,500 invested.

Stats:
PITI is about $4,100 a month
We live in a single family house (no rental income)
Stache is $1,192,500 (split across retirement and brokerage accounts)

« Last Edit: November 02, 2019, 02:30:28 AM by Sonos »

Papa bear

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #9 on: November 02, 2019, 07:43:26 AM »
It is still wildly answer B.

Plus, you still need to factor in depreciation and depreciation recapture on the rental portion.


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v8rx7guy

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #10 on: November 02, 2019, 07:54:23 AM »
I think you'll have a hard time selling it for $1.8M, but I hope for your sake that I'm wrong!  Buyers who purchase multi family are in it to find profitable properties... buying for $1.8M is not going to pencil out.  I mean, for $4k/mo rent before expenses, we are talking in the realm of their money would pay better in a high yield savings account. 
« Last Edit: November 02, 2019, 08:02:05 AM by v8rx7guy »

bacchi

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #11 on: November 02, 2019, 09:56:23 AM »
Did all $250k of the remodel costs go to the rental unit?

You need to divide first. The rental unit gets 33% of the sale:

1.8M * .33 =

$594,000
- rental building cost
- rental land basis
- rental remodel costs/capital improvements
------------------------
= rental profit



The IRS will see this as 2 livable units. You get the full $500k exclusion on your primary unit.

Archipelago

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #12 on: November 02, 2019, 12:05:41 PM »
You've won the game. Congratulations!

Now get it on the market.

Sonos

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #13 on: November 02, 2019, 03:10:59 PM »
To answer some questions:
The $250k in repairs and remodels were used both for the unit we live in and for the apartment we rent out.

Also, it likely won稚 be rental investors buying our house for $1.8M it will be developers that will put 2 townhomes in the backyard.

robartsd

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #14 on: November 05, 2019, 10:13:59 AM »
Did all $250k of the remodel costs go to the rental unit?

You need to divide first. The rental unit gets 33% of the sale:

1.8M * .33 =

$594,000
- rental building cost
- rental land basis
- rental remodel costs/capital improvements
------------------------
= rental profit



The IRS will see this as 2 livable units. You get the full $500k exclusion on your primary unit.
Don't forget depreciation recapture on the rental.

Basis for depreciation:
(Purchase cost (price + closing costs) - land value) * rental portion + rental improvements.
(900k + 40k - 200k) * .33 + 250k * .33 = 330k

Annual depreciation:
330k * 3.636% = 12k

Total depreication:
12k * 5 years = 60k

Depreciation recapture tax:
60k * 25% = 15k

Proceeds from rental sell
1.8M * .33 = 600k

Rental capital gains
600k - (330k building basis  + 67k land basis) = 203k

Rental capital gains tax
203k * 15% = 30.5k

Primary residence proceeds
1.8M * .67 = 1.2M

Primary residence capital gains
1.2M - (660k building basis + 133k land basis) = 407k (less than the 500k exclusion)

Total federal taxes: 45.5k

Even though you got to your tax total the wrong way, it turned out to be a reasonable estimate of what the taxes would be. There hasn't been any discussion of state taxes here yet (tax treatment varies quite a bit from state to state). Also if you failed to claim depreciation, you may be able to amend prior year returns to claim refunds offsetting the depreciation recapture tax.

SndcxxJ

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #15 on: November 05, 2019, 10:58:14 PM »
A $1.8M duplex? What part of the peninsula are you in?!

SwordGuy

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Re: House hacking a duplex, sell to put appreciation in index funds?
« Reply #16 on: November 06, 2019, 07:23:52 AM »
You realize that for the down payment you're discussing for a replacement house in your area, you could purchase a very nice house in my area, paid in full?

Or 2 nice houses that need a bit of work, one of which could be rented out, also paid in full?

You could be FIRED right away depending on your FIRE number.  Check out www.RootOfGood.com for an example of a family of 5 living on $40K a year in paid-for-house.   

Or, you could get jobs for a few more years in a lower cost area and FIRE in a few years.

Lots of options if you aren't tied to your high cost of living area.