I have posted here before to get everyone’s view on sell and take profit from our primary home or convert it to rental property. While I’m long on bay area, I’m also debating on if converting our previous primary home to rental make sense. We will be loosing 500K tax free gain which covers most of our gains in next two years. After that 1031 will be the only good option and become life long landloard.
Based on my math, once we cross exemption any gain of 245K on property will be nullify with taxes. So to get even, we will need our property to atleast gain 245K and above. Looking at shorter term I see more downside than upside in market. How do people justify leaving 500K non taxable profit on the table ?
Property was bought for 700K and now worth 1.35M. Given our tax bracket I will save 175K (33% of 500K) . To recoup that property needs to gain 232K. Sell cost will be 4% fees, 15K to make it sell ready and 10K other fees. Fees are constant assuming selling cost does not change in future. Loan left on the home is 400K.
If needed we can hold for 10+ years. We are young couple in mid 30s so passing it to kids tax free needs to be 30 - 40 + years planning. Can’t imagine what bay area will be in 10 years. Other concern is high equity in property and not able to leverage it. Do not want to cash re-fi as we are in year 8 of amortization. Do not want to reset principal payment to lower
Your selling cost is 92k. Tax savings is 165k. Net savings is only 73k. You will lose 6500 property tax savings per year.
If you never sell and let your kid to inherit, and assume you will live another 40 years, your property tax savings over the next 40 years is more than 260k.
If you can only hold for 10 years, you can save 65k in property tax over the next 10 years. Selling now would be a little better, especially if you plan to sell and not buy another.
The difference is small if you hold for 10 years. It really depends on how you will invest your 500k gain plus 300k equity.
I do not have clear plan for re-investing. I was thinking about putting into Index fund by DCA over next two years. 10-20% into out of state real-estate or Syndication deals. If real-estate market soften in next couple of years I may look into investing in Sacramento area. Right now that market looks too hot. Holding over 10 year is possible but it is harder for me to imagine anything over 10 years horizon.
Your home purchase has made a lot of money for you. Is your other investment in the last decade better or worse than your house?
The key question is how good an investor you are. If you are really good at investment, you can sell and make a better investment. How do you know whether you are a good investor? You can ask your wife to rate you objectively and ask her whether she would feel comfortable to give you 800k to invest
My last decade investment outside home did perform okish. Started to auto invest in index couple of years ago and its doing decent (70% US Stock index, 20 International, 10 REIT). Return since 2016 is 6.3% annually. Other stock investment did well but it was accidental hold in one of FAANG for long period. Would count that as a luck than investment strategy.
Looking at VTSAX It was at 37.77 on 2007 and it took 4 1/2 years to get back to same level. I started during good time so can’t think how will it be during bad time.
I think you have good risk management and have realistic expectations. You will do well either way.
Most people in this forum will advise you to hold the house. I would also do that, but mainly for risk management. There will be a lot of hot enticing investments. Considering that I speculated in bitcoin a few weeks ago, I would trust a house more than investable cash.
If you bought a lot of bitcoins before, you better hold the house
Holding onto stock is much more taxing psychologically than holding onto a house. The daily gyration will give you tons of temptations to sell at the worst moment. Assuming you have a 401k account at work you already have some stock exposure. If you work in tech and have RSU I think that’s enough stock exposure. A house in Bay Area is pretty similar to a non-volatile, income-producing asset that tracks the Nasdaq. With Prop 13 behind your back there are really no reasons to sell.
Wanted to auto invest in Index and do not touch. I have done that for past 3 years and so far I’m not tracking it. For all my other individual ticker I check prices everyday and make some stupid calls.
Only because you are not strong enough. I already knew when you got rid of apple and fb. You need to work on your mental resolution when it comes to stocks.
I have been all along bullish on bay area real estate (and even now on growth and appreciation). However, for the first time, I vote for selling and taking capital gain free tax exemption and investing in stocks gives better as California is changing law and uncertainty of small rental investors.
They already tried removing prop 13, indirectly prop 10 and now state wide rent control on SFH. The by-laws of rent control will kill small investors. Only big apartments investors can withstand the pressure (100% true-I do not want to explain any further) when rent control is effective. Above all, CA has personal income tax in case of long term capital gain. when you sell as rental or stuck with 1031 only.
First, you get tax free gain cash. Second, your idea is the best to buy SPY and hold until you need money to get decent return. I would even suggest to spread the investment this way,
Buy 34% SPY, 33% QQQ and 33% ITA (If you have faith in US defense, highest US budget goes here) hold for ever.
or
Buy 34% SPY and 66% QQQ hold for ever
QQQ (higher risk with 100 companies) has better long term growth than SPY(lower risk with 500 companies)
If you move out of state during retirement period, say Texas or Seattle, you can even get the capital gain without state income tax.
Additionally, high income tax state during retirement is big issue. Say if you sell index funds every year, 100k during retirement, you end up paying $9300 (9.3% ca tax) which is not there in WA or TX.
If you hold CA real estate, even if you move out of CA, you need pay taxes, that is not the case for stock investment (It is impossible for ca franchise team to challenge you later) when you permanently change your residency later (who knows where you will be at the time of retirement).
Unless you plan to provide your rental property as inheritance to your kids, it is not worth holding such.
Your plan seems to convincing to me (personally) and I may also do similar in future(I do not know at this time).
California is changing political and socialistic attitude is against the small investors. It is a curse against capitalism (Unfortunately!)
I may not answer any questions as I do not have time to look this blog, personal issue, but this is the best I think people like me too (Small rental investors).
