Take 500K tax free gain or convert primary home to rental property

[intangible]

This old thread may be of help

Primary Home Tax Free Gain - To take or Not is the question

As it so often happens, our threads here digress. As so we were talking about advantages of primary home tax free gain on the Apple thread. I wanted some feedback on the basic scenario and calculations I did below so posting this as a separate thread. Comments / feedback welcome. The question is: when one is ready to move on from the primary home and has the means to buy another primary home plus maintain a rental, what’s the best approach - (a) convert primary to rental, or (b) sell primary to reap tax-free gain and buy similar rental. For evaluation, let’s consider investment horizon is 10yrs after which rental property will be sold in either case. Scenario: Initial Purchase Price = $500k Assume 100% appreciation in 2-3 yrs Tentative Sale Price = $1M Purchase Price of equivalent rental = $1M Max Tax free gain = $500k Tax saved (at 15% long term capital gain) = $75k Real Estate Txn cost in selling primary and then buying rental = $60k (6% closing cost on $1M) All gains pu…

[hanera]

@BAGB

Your selling cost is 92k.

1.35M * 0.04 + 15k + 10k = $79k?

@Jil

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.

@GuideMe11

Would love to view your take on Bay Area real-estate vs Index

Index

@GuideMe11

I was thinking about putting into Index fund by DCA over next two years.

@Jil

If you move out of state during retirement period, say Texas or Seattle, you can even get the capital gain without state income tax.

You are getting it I think there is some time restrictions.

@Jil

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).

You’re getting it

[Elt1]

Take the gain every two years if you get $500k tax free every two years it is the fastest way to wealth I know. Becoming a landlord has many challenges… not for everyone. Take the gain and get into stocks… Seems to be the preferred investment on this forum. Or move the money into a better house. Plenty of options. 1031 if you like but you will become a landlord for life.

[manch]

What percentage of your net worth is in RE vs stocks?

[hanera]

@manch

What percentage of your net worth is in RE vs stocks?

@wuqijun said you know enough

[hanera]

@Elt1

Take the gain every two years if you get $500k tax free every two years it is the fastest way to wealth I know.

Two years might be too short. This strategy works if, during those two years.

A. appreciates more than commission and close to $500k gain
B. Make significant home improvements
C. Enjoy changing residency so often
D. Plenty of original condition houses

If don’t make home improvements, there is no point as you would end up buying the same house at higher price or move to a less desirable neighborhood.

[Jil]

@manch

What percentage of your net worth is in RE vs stocks?

If RE is in CA, it will be a big issue when rent control applies to all small investor rentals. It is nightmare with legal issues. Unless someone goes through the pain, they will not understand the complexity of rent control…

[harriet]

@wuqijun

I already knew when you got rid of apple and fb.

He got rid of FB??? What happened? He’s not walking the walk

[wuqijun]

Old news. See the FB thread. He got rid of it near the trough back in the end of last year as the market volatility was too much for him to handle.

[harriet]

I thought he got back in after that.

[wuqijun]

Highly doubtful but who knows.

[harriet]

Pretty sure he went back to good ol’ Zuck after Dr. Evil lost his mojo.

[wuqijun]

Is there any textual proof of that ever happened? Even if it did, still 2 major errors:

1. Sold low and bought back high FB
2. sold Amzn for no good reason

All in all a horrible move.

[hanera]

He goes in and out, in and out, not sure is in or out now Based on last known status, FB + cloud princesses + China stocks.

@manch misunderstood the momentum approach, supposed to be get in fast, get out fast. Instead he hodl Holding is for those who have patience of a crocodile, waiting to buy at a good margin of safety.

[wuqijun]

I wonder why he couldn’t apply the same mentality to stocks as he did to RE. He held on to all his rentals for a while now and is doing quite well with them.

[harriet]

Because he bought his rentals at the trough. If he bought them at the peak he might have sold them already.

[wuqijun]

Not really. He didn’t buy them all back in 2011. But they were definitely all still on the way up back in 15-16.

[hanera]

@wuqijun

I wonder why he couldn’t apply the same mentality to stocks as he did to RE. He held on to all his rentals for a while now and is doing quite well with them.

He got lucky and bought those rentals cheap around 2009-2015. As for stocks, he got margin calls! He tries to mirror the leverage as for houses. And because he used cheap brokerage firm, his shares are auto sold by brokerage firm during a sudden deep fall.

[harriet]

Since his first purchase there hasn’t been a RE meltdown. His personality is more suited for RE because it’s sticky.

[wuqijun]

Not the right approach. Should have taken the equity out of those rentals and do a long term buy and hold with stocks. He couldn’t successfully do a buy and hold because he is leveraging too much margin and failing to use the available equity he has in RE.