The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: SunnyCalifornia on October 02, 2020, 03:02:26 PM
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New member, but long time lurker!
My husband and I are considering selling our house and renting. We love our neighborhood, but we are right on a busy highway and the noise is the primary reason why we would like to move. We have been looking for several months to find another house to buy, but we would really love to stay in the neighborhood and there are probably less than 100 homes that meet our location requirements. We are also quite particular about the layout and condition of the home and privacy.
We have finally found our perfect house...except that it's not for sale, for rent only! The owner has moved into a nursing home, so we could potentially buy the house down the road.
We would plan to sell our house and hold the money in some sort of high interest account. Then plan to purchase another house in the next few years, perhaps this rental, or a different location depending on our life situation and the local housing market.
We hate to give up such a secure position, but we really love the rental house and feel like it is a good time to sell our current house.
Does this seem like a crazy idea?
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Since you know something about the owner of the house, I suppose you've already inquired about renting and had some conversation. Is someone in the family renting it out on behalf of the owner or is the owner still involved in the property? Why not ask about the possibility of buying? Have they already told you they're not interested?
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There's a house like that on my block, except it wasn't rented. It's vacant, abandoned, and will probably need to be torn down at this point. The legal owner is still alive, 10 years on, but can't/won't sell. It's not the only eye sore, and it is at least at the other end of the block from me.
Who would be the landlord? When something breaks, who do you call? Not the owner - they're in a nursing home.
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One thing to consider is your tax basis. In California, if you’ve owned your home for a while, chances are the property tax on your home is calculated on a house value that is much lower than the current market rate. If you’re over a certain age, then if you sell your house and buy another shortly thereafter you may be able to transfer the reduced property tax basis to your new home. But if you’re under that age, or if you wait too long to buy another, then it won’t apply. It might not be a factor, but it’s definitely something you’ll want to investigate as it could change your decision.
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One thing to consider is your tax basis. In California, if you’ve owned your home for a while, chances are the property tax on your home is calculated on a house value that is much lower than the current market rate. If you’re over a certain age, then if you sell your house and buy another shortly thereafter you may be able to transfer the reduced property tax basis to your new home. But if you’re under that age, or if you wait too long to buy another, then it won’t apply. It might not be a factor, but it’s definitely something you’ll want to investigate as it could change your decision.
This is no longer true - the "replacement rule - of equal or greater value" was repealed in 1997.
https://www.investopedia.com/terms/deferred-gain-on-sale-of-home.asp
It only applies if former deferred gains were rolled into this house prior to 1997.
What *is* still in effect is the capital gains exclusion - $250k per individual, and $500k per married couple, if you've lived in the home at least 2 of the previous 5 years.
If your gain is lower than that threshold - including purchase price, improvements, transfer taxes and realtor fees - you owe NO capital gains on any of it.
If instead you're talking about the transfer of the PROPERTY TAX assessment rate, that can ONLY be transferred in certain (limited) counties, and only ONCE per couple, after they reach age 55, OR if they are a vet. To qualify, you MUST be on the title of the house you are selling. The number of counties participating in this tax reciprocity program have dwindled in recent years; only 10 California counties still participate.
It's called Proposition 60, and Proposition 90.
https://www.boe.ca.gov/proptaxes/prop60-90_55over.htm
The current Nov. 3 CA ballot has an EXPANSION of this on the ballot, which would allow people to transfer their tax rate 3x in their lifetime, to any county in CA.
So OP - yes - you can sell your home, bank the appreciated gain, and rent with no tax consequences - as long as your gain is under $500k for a married couple.
Keep in mind the owner of the rental may intend to die while still owning it, as the house would then have a new "stepped up basis" for tax purposes, which is a HUGE avoidance of taxes for those heirs. So it could take awhile before the house is on the market, depending on age and health of the owner.
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One thing to consider is your tax basis. In California, if you’ve owned your home for a while, chances are the property tax on your home is calculated on a house value that is much lower than the current market rate. If you’re over a certain age, then if you sell your house and buy another shortly thereafter you may be able to transfer the reduced property tax basis to your new home. But if you’re under that age, or if you wait too long to buy another, then it won’t apply. It might not be a factor, but it’s definitely something you’ll want to investigate as it could change your decision.
This is no longer true - the "replacement rule - of equal or greater value" was repealed in 1997.
https://www.investopedia.com/terms/deferred-gain-on-sale-of-home.asp
It only applies if former deferred gains were rolled into this house prior to 1997.
What *is* still in effect is the capital gains exclusion - $250k per individual, and $500k per married couple, if you've lived in the home at least 2 of the previous 5 years.
If your gain is lower than that threshold - including purchase price, improvements, transfer taxes and realtor fees - you owe NO capital gains on any of it.
If instead you're talking about the transfer of the PROPERTY TAX assessment rate, that can ONLY be transferred in certain (limited) counties, and only ONCE per couple, after they reach age 55, OR if they are a vet. To qualify, you MUST be on the title of the house you are selling. The number of counties participating in this tax reciprocity program have dwindled in recent years; only 10 California counties still participate.
It's called Proposition 60, and Proposition 90.
https://www.boe.ca.gov/proptaxes/prop60-90_55over.htm
The current Nov. 3 CA ballot has an EXPANSION of this on the ballot, which would allow people to transfer their tax rate 3x in their lifetime, to any county in CA.
So OP - yes - you can sell your home, bank the appreciated gain, and rent with no tax consequences - as long as your gain is under $500k for a married couple.
Keep in mind the owner of the rental may intend to die while still owning it, as the house would then have a new "stepped up basis" for tax purposes, which is a HUGE avoidance of taxes for those heirs. So it could take awhile before the house is on the market, depending on age and health of the owner.
Yep, I’m talking about prop 60 transferring the property tax assessment rate, which is applicable within the same county in all CA counties (OP is looking to stay in the same neighborhood), pending the OP qualifies on age and the new house would be purchased soon enough, etc.
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How bout looking at it as a straight investment proposition? Is it better to sell and then just rent? Or sell and replace? There are all sorts of calculators that will show cash flow. If it’s not a cash flowing property, in my view that’s a indication that you should probably rent it and let someone else take the loss.
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I live in CA. I'd do it in a heartbeat. Prices are insane right now. I expect the family renting the house wants the steady monthly income without the potential tax consequences of a sale. Rent the house, take good care of it and see what happens. Go for it!