I have a 5 br house in Hayward, which I was unable to sell in 2016. I ended up moving out of state and renting it out to students, whose lease will end in 2019.
Now, I feel like its too late to sell the CA house and move the proceeds to the 2nd house I purchased in 2016 tax-free, because its been almost 2 years. I know we don’t know what the housing market will bring, but I am really tempted to sell now. Initially, I was considering making it a rental home forever. I have a 12 years left on the mortgage ($3000/mo), owe $290k, and receive $4800/mo in rental). Redfin estimates my home to be worth $874k, Zillow at $1.2.
How about doing a 1031 exchange like I am doing now? I sold the rental property and now I am in contract to finalize the exchange property. In fact, I better go for now, I am supposed to go there and see how the progress is going…
I moved out of state in early 2017. I worked with too many people that sold a Bay Area home, then they were priced out later when they moved back. If you’re early enough in your career that you might move back later, then, I’d keep it as a rental. It’s what I did. I can always 1031 to a rental in another location later.
Don’t be tempted by the tax free gain. It’s not worth it! 5 years down the road you will make much more than 500k even if you had to pay tax selling it.
"Now, I feel like its too late to sell the CA house and move the proceeds to the 2nd house I purchased in 2016 tax-free, because its been almost 2 years. I know we don’t know what the housing market will bring, but I am really tempted to sell now. "
Unclear what is going on…You may have missed the tax free window…1031 makes sense if you want to max your cash flow…Otherwise keep it if you can not get tax free gain…
Thank you for the tip regarding 1031 exchange sfdragonboy and marcus335. I was not aware of this before, so thank you. The possibility of moving back to CA is always at the back of my mind, because of my career in tech.
Ok, I’m back… what did I miss? Since you indicated that you were not aware of it, are you familiar with this strategy as an extension of the 1031 exchange: sell the rental and exchange for another rental (could be almost anything that is real estate based, meaning a SFH, a multi unit, even a commercial lot that I was considering) of equal or more in selling price than what you sold, then you rent that out (rental to rental) but in about oh 2 years you are going to move into that rental (reason why I used SFH since easier and cleaner in example) and convert that into your primary home. You will then proceed to to live there as long as necessary until you gain enough to wipe out some of the capital gain. Obviously disclaimer is in order: consult your CPA or tax professional…
Thank you so much for sharing this very smart strategy! Based on the recommendations by very smart people here, I am starting to lean towards keeping it as a rental. My primary concern initially was the tax implication of selling the home after 2 years. 1031 exchange + converting it into primary home seems like a really good strategy.
If I decide to sell the home that I bought after 1031 exchange, I assume the capital gains of the previous home will be wiped out and I will just be taxed on the appreciation of the 1031 exchange home. Is that correct?
If you sell during the 2 out of 5 year window, you will still get the cap gains and the rest will be treated as 1031. If you are outside, then it is all 1031.
btw once you are on the 1031 drug it’s hard to quit as you will have a big tax bill if you ever cash out. So the only way to get cash in hand is to refinance and borrow against your property.
Well, the normal way in a 1031 exchange is to sell the rental first, then all proceeds have to go to an exchange intermediary who holds the funds while you go and find your replacement property. You have essentially 45 days to identify and 180 days to close. You can identify up to 3 properties (and there is some nuance to that) but essentially it is identify and MUST close within 180 days or exchange is jeopardized. No exceptions. So, in this tight market, it is very scary to just sell and go hunting, not knowing if you have the end product in your hands for sure. Ah, but there is a solution, and that would be a reverse exchange where you essentially buy the end product first but that means you have to have the money to do that (not rely on the sale of the rental in a straight exchange) and a reverse exchange is more pricey to do (maybe $1k vs I believe $4-5k). Seeing how this market is and not really wanting to do a reverse exchange, I came up with a good strategy that worked out for me. I dangled the listing of my rental investment property out there online to whomever can find me a off market listing in the areas I wanted. Essentially, I had about a dozen agents hunting for me. Sure enough, I found a cooperative seller of a place that we liked and he gets his price (arguably I am not paying much of a premium, the opportunity is what I want and need) and time to slowly get it ready for sale. Hopefully, we close by month’s end. Done!!! Amazing what you can do if you put your mind and effort to it. Never listen to the naysayers who say it can’t be done in this hot market. I just did it.
I get that the 180 days part - i.e. buy the replacement property within 180 days of selling the original property. What I don’t get is the the “identifying” deadline. What are we identifying? Why 3 properties? Does the replacement property you end up buying after 180 days have to be the one you identified in 45 days? This means dip shit in BA when it can take months to find something. Once you’re in contract, 2 months is plenty of time to close the purpose (so 180 days is more than enough).
One of the properties that you identify you have to close or buy. So, how you get around it, is the way I did it, I “identified” the place upfront right? I had a written agreement with the seller that he would sell to me after I sold my Oakland place. Why would a seller do that you ask? Well, he liked me (who doesn’t?) and seriously he got his asking price and some time to get it ready for sale. Win win…
Absolutely… I would be sooooo stressed and losing sleep. Who wouldn’t be? Lamest tax regulation ever…I suppose strict so that not too many people can use this great tax loophole. I have heard people not being able to identify in time…yikes!!!