To sell or not to sell?


#1

As J$ is taking opinions about selling his websites, I thought I would pose my own sales question.

The background-In 2012 at the bottom of the housing crisis, I ended up moving and since the market was rough for selling houses, I became a landlord. Over the last 4.5 years I have made a little money and someone else has paid down a a good chunk of my mortgage. However, I have also been lucky that the few repairs I have made have not broken the bank(especially since I live 5 hours away and can’t inspect contractors or fix the simple stuff).

Since the market has bounced back nicely and I am not planning to make my millions via real estate, I am leaning towards it being time to sell and walk away from the table.

  1. Since the profits are (I believe) considered to be capital gains and right now I am still in the 15% bracket, it would be taxed at 0%.

  2. The house is now 16 years old, I am sure that a new roof, new AC, etc will be coming up in the next few years, all big money I don’t want to spend.

  3. The return on investment from the rent is currently about 7%, not bad but it comes with financial liability if something breaks.

  4. It is steady income in a market that has very low interest rates.

Some insight from anyone who has been her before would be great.


#2

@Math_Guy

I’m not sure there’s enough information regarding your specific numbers to offer you useful insight.

Here’s a couple questions for you to do some research / analysis on:

1.) Will adding this capital gain income to your other income keep you in 15% bracket? In other words, if it bumps you into the 25% bracket, I’m assuming that you would pay the regular long term capital gains rate of 15% for some portion of this gain that goes above that.

2.) Any state income tax?

3.) An FYI, You most likely took a depreciation deduction the years that you have rented this property out. You will need to pay that back. That is taxed a federal rate of 25%, and i assume your marginal state tax rate.

See: http://www.michaelplaks.com/free-irs-tax-advice/articles-irs-real-estate-tax/irs-depreciation-recapture


#3

I’ve never been in the exact situation but if I were, I would sell. There are other ways you can invest and this property wouldn’t likely be the one you would buy as an investment if you didn’t own and were looking for an investment property today.

Yes, you should be responsible for taxes on the gain since you haven’t lived there for 2 of the past 5 years. Not sure 0% vs 15% capital gains.


#4

As a guy who goes with his emotions/desires first, and then looks at the financials to make sure it’s not totally stupid, I’m all about offloading stuff that doesn’t make sense anymore. Whether it’s property, relationships, side hustles, etc… There are always reasons to keep something, but if it’s no longer a priority to you and you’re not passionate, it’s always hard to keep pouring energy in.

So my vote is to do what will make you/your lifestyle happier, and then figure out how to do it in the best way possible without screwing yourself in other areas (in this case, financials).


#5

TJ- Those are great questions and exactly why I am a novice at real estate.

1.) Yes, it would push me into the 25% bracket, I have no idea how capital gains tax work since I have never sold anything and had capital gains.

2.) Yes, 6%. Again no idea how capital gains are computed

3.) Depreciation was about 5k per year totaling about 25k over the last 5 years.

This is exactly why I posted, I don’t know enough to even ask intelligent questions yet.


#6

I want this question on dear dollllllllars.


#7

Following the advise of J$, I know that I want to sell it have one less thing to deal with so away it goes.

Just for anyone who is interested or someday does a google search and finds this forum thread, I will try to update is with what I learn and where I go wrong so that others can learn from my mistakes (and maybe some of you smart people out there can give my your two cents when I am headed down the wrong path).

If I was well up the tax bracket chain I wouldn’t have a lot of choice but to bite the bullet and pay the 15% capital gains tax and move forward. However, for me, that would be too easy.

From what I have learned in the 10% or 15% tax bracket, capital gains are taxed at 0% Federally,:slight_smile: and 6% here in Georgia. However that is only for the amount that you have room left in those tax brackets. Example for 2016 the 15% tax bracket is up to $37,650, so if your income after deductions and all is $30,000 (your AGI), the first 7650 would be taxed at 0% and the rest at 15% (unless it was a huge gain and got into the 20% bracket, which I won’t unfortunately).

Here is where things get interesting, since deposits into tax deferred reduce your AGI, and I am going to clear enough in capital gains to fill the 15% bracket, every dollar that I put into a retirement savings account (401k, IRA etc) that is tax deferred makes room for a dollar of capital gains to pay 0%. This makes the marginal tax rate on earned income 15%(if earned income is less then the standard deductions, assuming question 1 is true), 25%(if its in the 10% bracket) or 30%(if its in the 15% bracket).

There are 2 things that I am still looking into,

  1. If my earned income is below the 10300 standard deduction and personal exemption, will they off set capital gains?

  2. How far can I push the limit before the Alternative Minimum Tax becomes an issue?

I am always up for any insight anyone has and I will post what I learn in case someone else goes through this later.


#8

If you want to look into and post what you find I am happy to help.