Rent or Sell?

[Hot dog]

I am trying to decide what to do with my old house. Do I sell to avoid capital gain tax (within the next year) or do I continue to rent. My renters have just told me they are leaving (three months before the lease expires). At least they told me. I have heard lots of horror stories. Her grandmother is sick and she wants to go live with her. It would be so much easier but we have done fine this past year. I keep hearing DR saying if you will live now like no one else later you can live like no one else. The house will be 10 yrs old so I am expecting for appliances and hot water heaters to go up other than that it is in good condition. I do have children in 10th and 11th grade. So was wondering for financial aid for college if they take into consideration the house. They would definitely take into consideration the money in the bank. I figure we would probably get 20,000 less for the house than 1 1/2 yrs ago so if we wait a couple years and have to pay taxes if the price goes back up that will be the taxes. We could also keep it till we retire. Any opinions??

[jIM_Ohio]

I am not clear on the situation... I think $250k capital gains is allowed (tax free) on a house (or is that only for primary residence?).

In addition, the financial aid application will figure out your net worth and look at tax returns. I don't think selling now will help that cause. It could "temporarily" boost your net worth and tax return, when it would be best to minimize transactions like this.

How much cash flow does the rental unit generate, what is owned, what is borrowed? What are estimated repair costs between tenants? Can you find another tenant?

[Hot dog]

Is that the case? I don't know. I thought that you have to sell within 2 years or it becomes a rental to not have to pay capital gains.
I was thinking that if I did sell it may not help with getting loans and financial aid for the children who are close to college age. I only have 20,000 saved (10 each) so far for their education. I can sell it to help with that but is it wise to have that $ liquid when it comes to loans and FA.
Right now it makes about 300 a month which goes to pay the extra loan we had to get cause it didn't sell. That is for 20,000 ( down from 25 in one year) Now we are about to pay off car which will also go to that. The other thing is it is an ARM just went to 7.5% so it will go up about $30 but we could increase the rent. This all just happened so we have to list it in the paper to see what happens. We owe about 70,000 It could sell for 200,000 give or take We had it listed at 225,000 only had about 5 people come to look cause of the market slowing down last year.

[jIM_Ohio]

Is that the case? I don't know. I thought that you have to sell within 2 years or it becomes a rental to not have to pay capital gains.
I was thinking that if I did sell it may not help with getting loans and financial aid for the children who are close to college age. I only have 20,000 saved (10 each) so far for their education. I can sell it to help with that but is it wise to have that $ liquid when it comes to loans and FA.
Right now it makes about 300 a month which goes to pay the extra loan we had to get cause it didn't sell. That is for 20,000 ( down from 25 in one year) Now we are about to pay off car which will also go to that. The other thing is it is an ARM just went to 7.5% so it will go up about $30 but we could increase the rent. This all just happened so we have to list it in the paper to see what happens. We owe about 70,000 It could sell for 200,000 give or take We had it listed at 225,000 only had about 5 people come to look cause of the market slowing down last year.

This makes it sound (to me) like there are bigger problems financially.

What is owed on rental unit? 1st and 2nd, list seperately
The car was purchased using equity from the rentals, correct? Is there other debt you have?

If the unit has $300 positive cash flow per month, but this cash flow is swallowed up by debt, the problem is really the debt, and not the rental, correct?

[Hot dog]

I guess I have really confused you. The only debt other than mortgage that I have is a 3.9% car loan that I am about to pay off. When I built a new house though I would have the $ from the old house to put toward the new. It didn't sell so didn't quite have 20% so got a 2nd on the new home so no PMI. It was for 25,000 now after a year down to 20,000. The old house has a mortgage of $70,000 and the rent covers that plus the second on the new house and maybe $150 extra. The old house has the ARM which was down to 4.5% the year we were building and has increased and this year will be at 7.5% which has increased the mortgage maybe $30 from the 6.5% it was last year. Never locked in cause always thought we would sell so now if we keep it will think about refinancing. The only debt we have now in the next couple months will be the three mortgages.

[jIM_Ohio]

I guess I have really confused you. The only debt other than mortgage that I have is a 3.9% car loan that I am about to pay off. When I built a new house though I would have the $ from the old house to put toward the new. It didn't sell so didn't quite have 20% so got a 2nd on the new home so no PMI. It was for 25,000 now after a year down to 20,000. The old house has a mortgage of $70,000 and the rent covers that plus the second on the new house and maybe $150 extra. The old house has the ARM which was down to 4.5% the year we were building and has increased and this year will be at 7.5% which has increased the mortgage maybe $30 from the 6.5% it was last year. Never locked in cause always thought we would sell so now if we keep it will think about refinancing. The only debt we have now in the next couple months will be the three mortgages.

Feel like Dragnet, just the facts, please.

1st mortgage property 1, is a 30 yr fixed, which you are paying on? what apr?
1st mortgage property 2 (rental) is an ARM???, paying 7.5% apr???
2nd mortgage property 1 is an ARM???, paying 7.5% apr???

The rent on property 2 covers the bills on property 2, correct?

My suggestion would be get out of the ARM's, refinance to 15 or 30 yr fixed products, and continue to rent (if you can find tenants).

Logic is "cash flow positive" rentals allow for good tax deductions. You could also tap into this equity within 2-6 years to pay for education. This would work best if 2nd mortgage was paid off.


don't need to know "why" you have 1st and 2nds... just need to know balances and payments. If you sell the 2nd property and could not pay all bills on first house, that is an issue which would need discussion.

[Hot dog]

property 1 -- 6% 30 year fixed
property 1--- 2nd is 15 year balloon 7.25
rental -- ARM 20 years left just adjusted to 7.5 starting in April

Do I keep it or sell? Advantages?? Disadvantages?? Just never intended on having a rental since we are not mechanically inclined to fix anything. However after hanging around this site am starting to think I should tough it out and use it as an investment and not sure what would be best for the college tuition. Don't think I will be able to get rid of a 70,000 mortgage anytime soon. 1st priority is the balloon which we always thought we would sell and pay off quick. Sorry, is this TMI

[34saving]

IRS rules say you must have occupied two of the last 5 years in order to avoid capital gains taxes. (IE, you could rent for three years and still avoid cap. gains if you play your cards right.) Some things to consider: 1) Rent with a lease-option (since you want to sell anyway.) 2) Would your kids consider occupying the house? I think as long as "kin" lives there 2 of the 5 years before you sell you can avoid cap. gains. 3) Most appliances have a longer life than 10 years

[jIM_Ohio]

property 1 -- 6% 30 year fixed
property 1--- 2nd is 15 year balloon 7.25
rental -- ARM 20 years left just adjusted to 7.5 starting in April

Do I keep it or sell? Advantages?? Disadvantages?? Just never intended on having a rental since we are not mechanically inclined to fix anything. However after hanging around this site am starting to think I should tough it out and use it as an investment and not sure what would be best for the college tuition. Don't think I will be able to get rid of a 70,000 mortgage anytime soon. 1st priority is the balloon which we always thought we would sell and pay off quick. Sorry, is this TMI

This makes more sense and is the information needed to make "financial" decision. There is risk to renting or doing anything else financially.

question 1 is what would you get if you sell?

could it pay off mortgage on property 2?
could it fund education in it's entirety after paying off mortgage on property 2?
what would impact be on income tax returns and financial aid application?

question 2 if you keep, what would cash flow be? I'd suggest getting out of adjustable rate loans, so I might make 2a) and 2b), one with current loans, and one with refinanced loans.

could cash flow from rental fund education?
If not, what is shortfall? What are options to cover the shortfall?
what is impact on tax returns and financial aid. You may be able to hide assets on the rental (meaning spend $$, to fix appliances etc..., which is a business expense, which might lower your tax bill).

Spending 3 hours with a tax accountant might clear up 1 vs 2 with respect to financial implications of each situation.


How much would tuition be? Is your retirement funding on track? Fund your retirement before funding anyone else's education.

[disneysteve]

Just never intended on having a rental since we are not mechanically inclined to fix anything.

I think yours might be a psychological question as much as a financial one. Rental property can be a very good investment, but it isn't right for everyone. Personally, I know I'd be lousy as a landlord. I just know my strengths and weaknesses and having to manage another property would be bad for me. So I have chosen not to buy rental property. Instead, I fill the real estate need in my portfolio with a good REIT fund.

If you don't want to be a landlord, sell the place, regardless of the financial issues.

[Hot dog]

I thought that if you lived in the house 2 out of 5 = no taxes I asked the person who did my taxes and she said if you rent for two years straight it is considered a rental also if I used depreciation on my taxes then it was definitely a rental and I shouldn't claim that unless I knew for sure I didn't want to sell. I am putting close to 10% to 401K but really want to start a Roth soon. Have 20,000 for the kids education (in MM account, is there a better way?) and 10,000 for EF. I know I have all kinds of questions. Thanks for all the great input. Wish I had a crystal ball

[34saving]

My understanding (not an expert, but have been there) is that you need to recapture the depreciation when you sell, but the gain is still tax free. (IE, if during the rental period you claimed $10,000 in depreciation, when you sell you'll have to pay capital gains on that $10,000 but not the other part of the gain. BTW, whether you claim the depreciation OR NOT you'll have to recapture it, so you might as well claim it.) Again, not an expert

[Scanner]

It may be time to bring in your accountant but I'll just offer this - sometimes you have to make business decisions independent of tax consequences.

Sometimes it'ss wise to just take a profit, even if that has tax consequences. I am not saying ignore the tax man but you'll go nuts trying to escape Uncle Sam at every turn.

If it helps, think of Uncle Sam as a partner.

[MonkeyMama]

My understanding (not an expert, but have been there) is that you need to recapture the depreciation when you sell, but the gain is still tax free. (IE, if during the rental period you claimed $10,000 in depreciation, when you sell you'll have to pay capital gains on that $10,000 but not the other part of the gain. BTW, whether you claim the depreciation OR NOT you'll have to recapture it, so you might as well claim it.) Again, not an expert

Yes, the 2 of 5 years still applies, but it is still a rental also. HEck, if you rent it a few months isn't it considered a rental.

It is tax-free - the gain - but yes you will pay tax on the recaptured depreciation. However, you may have some unallowed losses from the past you may be able to use when you sell. You are limited what you can deduct as a loss on rentals year by year - but if you ever had disallowed losses you get to claim them all in year of sale - to offset the gain anyway.

Regardless, tax-free on the rest of the gain - you'll hardly beat that tax-wise -but I agree there is a lot more to a decision like this than taxes.

[Ima saver]

I have had rentals and my husband is handy, but I would sell. We had terrible tenents that tore the place up and I sold all 3 of them for much less than I paid for them.