Author Topic: When can we consider a rental property a primary residence / should we sell?  (Read 787 times)

fallstoclimb

  • Handlebar Stache
  • *****
  • Posts: 1085
We're accidental landlords.  We purchased a single family home in May 2013.  In April of 2017, we moved out, and found a renter the next month. 

Our primary reason for not selling the home immediately was because we weren't sure we'd be happy with our move.  Turns out we love it, and I don't see us ever returning to our old neighborhood.  We are currently renting in our new neighborhood, so we only own the one property, although we are starting to think about purchasing a second.  (Are there ramifications of that?)

We have good tenants but the numbers aren't good as an investment property -- our mortgage is $1680, and we rent it out for $1900 (we do the property management ourselves).  This year is already a loss, due to a month of vacancy upfront, and then a burst pipe that cost 1K.  I expect this to break even or worse moving forward, and I do worry about expensive issues like a new roof or new sewage pipe (both perhaps five years away).

I'm kind of thinking that we'll sell when these tenants move out - they indicated they would likely stay for a few years, until they can afford their own place, although of course you never know.  (I also secretly hope they might want to buy our house, to save us the realtor costs).  But, I want to make sure I'm taking into account tax implications with this decision.  My reading of the 2-in-5 rule (linked below) is that we can avoid the capital gains tax if we sell the house within three years of moving out.  Is this accurate?  And, if so, does that mean we should be claiming the home as our primary residence on taxes this year?

And, could someone help me with a very very rough ballpark of the effect of the capital gains tax versus typical taxes from selling your primary residence?  We bought the home for $300,000, I think we could possibly sell for 320-330, and our mortgage is currently $260,000. If our income matters, our taxable income is about 125K.

https://www.irs.gov/taxtopics/tc701 

sammybiker

  • Bristles
  • ***
  • Posts: 376
    • Making 200k in equity in 6mo - Back down the rabbit hole, long distance RE
A definite sell based on those numbers.

I'll defer the tax questions to someone better in that department.

Only 20-30k worth of appreciation from 2013 to 2017?  Have you checked comps with a couple different agents?  They'll do it for free - I'd be surprised if appreciation was that little, especially in those years.

fallstoclimb

  • Handlebar Stache
  • *****
  • Posts: 1085
A definite sell based on those numbers.
Only 20-30k worth of appreciation from 2013 to 2017?  Have you checked comps with a couple different agents?  They'll do it for free - I'd be surprised if appreciation was that little, especially in those years.

This might be an underestimate, I just popped on Zillow and looked at some comparable houses.  Trying to keep expectations low, but that's maybe not the best approach in terms of estimating taxes.  Let's say 340.   

HawkeyeNFO

  • Bristles
  • ***
  • Posts: 295
  • Location: Moose Scrotum, Alberta
  • Retired at 44.....back to work at 45
At tax time, be sure to take the depreciation.  Because when you do sell, you're going to pay depreciation recapture, whether or not you took the depreciation.  Add that to your capital gains tax if you wait too long to sell.

So your mortgage is $1680 and your tenants pay $1900?  What about taxes?  Insurance?  Repairs?  HOA?  Management fees?  I'd sell it.  Maybe you could work out a deal with your tenants if they're truly interested.  Save you some realtor fees, plus there wouldn't be a vacant house for you to pay for while it is on the market.

tralfamadorian

  • Handlebar Stache
  • *****
  • Posts: 1213
We are currently renting in our new neighborhood, so we only own the one property, although we are starting to think about purchasing a second.  (Are there ramifications of that?)

Yes, there are ramifications. Since you have less than two years landlording experience, the bank will not include your rental income against the loan payment. So, to purchase another house, you would have to qualify for both of the payments at once.

I'm kind of thinking that we'll sell when these tenants move out - they indicated they would likely stay for a few years, until they can afford their own place, although of course you never know.  (I also secretly hope they might want to buy our house, to save us the realtor costs).  But, I want to make sure I'm taking into account tax implications with this decision.  My reading of the 2-in-5 rule (linked below) is that we can avoid the capital gains tax if we sell the house within three years of moving out.  Is this accurate?  And, if so, does that mean we should be claiming the home as our primary residence on taxes this year?

I would sell as soon as their current lease is up. Just tell them the truth- you would like to consider purchasing a home in your new location and carrying two mortgages may affect your ability to get a loan.

No, you do not want to claim the house as your primary residence. This is fraud and does you no tax benefit.

And, could someone help me with a very very rough ballpark of the effect of the capital gains tax versus typical taxes from selling your primary residence?  We bought the home for $300,000, I think we could possibly sell for 320-330, and our mortgage is currently $260,000. If our income matters, our taxable income is about 125K.

https://www.irs.gov/taxtopics/tc701

Selling Price: $325k
Selling Costs: $26k
Purchase Price: $300k
Difference: ~$0

From the information given, it does not appear that you would have any capital gains and thus, no tax.

fallstoclimb

  • Handlebar Stache
  • *****
  • Posts: 1085
So your mortgage is $1680 and your tenants pay $1900?  What about taxes?  Insurance?  Repairs?  HOA?  Management fees?  I'd sell it.  Maybe you could work out a deal with your tenants if they're truly interested.  Save you some realtor fees, plus there wouldn't be a vacant house for you to pay for while it is on the market.

Should have been more clear, $1680 is PITI and we do all the management ourselves.  No HOA.  But yes, repairs obviously make this at best a break-even venture and I do agree that it makes sense to sell.  It would be ideal if our tenants would be interested.

We are currently renting in our new neighborhood, so we only own the one property, although we are starting to think about purchasing a second.  (Are there ramifications of that?)

Yes, there are ramifications. Since you have less than two years landlording experience, the bank will not include your rental income against the loan payment. So, to purchase another house, you would have to qualify for both of the payments at once.

Thanks for bringing this up, I had kind of forgotten about this!  I actually think we'd have a decent change of qualifying for both payments, but it's something to keep in mind, for sure.



And, could someone help me with a very very rough ballpark of the effect of the capital gains tax versus typical taxes from selling your primary residence?  We bought the home for $300,000, I think we could possibly sell for 320-330, and our mortgage is currently $260,000. If our income matters, our taxable income is about 125K.

https://www.irs.gov/taxtopics/tc701

Selling Price: $325k
Selling Costs: $26k
Purchase Price: $300k
Difference: ~$0

From the information given, it does not appear that you would have any capital gains and thus, no tax.
[/quote]

To be clear, does this mean that we wouldn't be paying capital gains regardless of the 2-in-5 rule because the house isn't profitable enough?

tralfamadorian

  • Handlebar Stache
  • *****
  • Posts: 1213
To be clear, does this mean that we wouldn't be paying capital gains regardless of the 2-in-5 rule because the house isn't profitable enough?

Yes. With the numbers given, your only potential tax ramifications of the sale would be the depreciation recapture but this would happen regardless of the 121 exclusion.