Author Topic: sell rental to pay off primary?  (Read 806 times)

kenmoremmm

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sell rental to pay off primary?
« on: September 20, 2017, 10:44:44 PM »
my wife and i have a condo as a rental.
value: ~$300k
rent: $1525/mo
HOA: $400
taxes: $2k/yr
insurance: $1k/yr
no mortgage

its longest period of vacancy in a 7 year window has been 3 days. repairs have been, and are expected to be minor.

primary mortgage has $328k of $345k remaining on a 30 year, 3.375% loan.

thinking i could sell, take proceeds, and pay off 90% or so and then either refi or reamortize and then pay off the primary.

thoughts? i really don't like having debt hanging over me. i know giving away a rental income is losing income long term, so there's that.

EarthSurfer

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Re: sell rental to pay off primary?
« Reply #1 on: September 20, 2017, 11:15:48 PM »
For the moment, I'll ignore the discussion about keeping the mortgage.

Disclaimer: I know enough to be dangerous... I recently sold my last rental property when property appreciation in Denver made getting decent return on the appreciated real estate impossible. (Section 121 exemption exclusion for those in the know.)

Tax law is designed to incentivize rental real estate investors to keep the capital gains in rental real estate. You will hear the phrase "1031 exchange" frequently.

First, the structure of your rental is only yielding ~3.5% before depreciation, and this is not good! With the low rent relative to the value, you should consider selling this property, although paying off your mortgage on your primary residence may not be a good idea since you may pay a shit load of taxes.

Did you live in this house at least 2 of the last 5 years? If so, this get complicated in a good way to save you taxes. You will be looking at a Section 121 exchange exclusion, and that is far above my pay grade.

We are missing three very critical numbers for estimating the taxes on your sale. First, we need the original purchase price on the property, and the costs of any improvements. Second we need to know the total depreciation claimed on the property. Finally, we need to know the top tax rate for your 1040 income.

Selling a rental and using the funds to pay off your mortgage will result in:

1. Capital gains tax on the increased value of the home, net of any improvements and sales costs.

2. Income tax on the amount of depreciation claimed. This is known as "depreciation recapture" and can be very significant if the property has been in service as a rental for a long period of time. This is taxed at income rates, not the lower capital gains rate.

Overall, you are likely to pay a lot of taxes to have access to the funds from the rental unit to pay off your mortgage.

AND the financial structure of the current rental property is not doing you any favors. I would prefer for you to sell the rental, and purchase several properties using a 1031 exchange. Those properties should have mortgages to increase your ROI.

edit: 2017.09.21, 10:22 AM : cleaned up some terminology & spelling errors. I really shouldn't be allowed to use my brain after 10pm.
« Last Edit: September 21, 2017, 10:22:13 AM by EarthSurfer »

kenmoremmm

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Re: sell rental to pay off primary?
« Reply #2 on: September 21, 2017, 10:10:32 PM »
original purchase price ~$180k
reno costs ~$25k
rental property since 2010
depreciation $6300, so it'll be $44k
top tax bracket this year is 25% (normally 28% when my wife is working FT)

the "3.5% yield" you note: i assume this is the cap rate you're calculating? i think that's actually pretty good for seattle area for someone with a property only held since mid 2000s. i could be wrong.