Texas Landlords, sell it or keep renting it (tax implications)?

[mk5.0]

This.

Agreed , I have a rental property in Waco that I am doing the same thing with. I plan to keep it rented for at least another 10 years.

[jakesford]

I see what you are saying, and I'd make that ~$35-40k (after expenses) in 8-9 years on the rental income, and still own the property. I'd have a fair bit more equity in the property in 8-9 years also.



I hadn't considered taking the funds from the sale and making another real-estate investment, but that's not a bad idea, so long as I thought the alternate real-estate investment would better position me than this existing property. The positive cash from this home has worked nicely to cover maintenance items over the years, with money left over.

I'm blessed that the tenants have done such a nice job taking care of (and improving) the place. We've done several projects where we split the costs and they provided the labor.

1. As mentioned if its been rental you can't exclude the gain, as it is no longer your primary residence.
2. Your tax basis = original cost + capitalized improvement - depreciation taken. If you have taken depreciation expense over the years you have been renting, and you sell at a gain there is depreciation recapture that is taxed at different (higher) rates than cap gain rates.
3. As mentioned, you could look into a "like kind exchange" under code section 1031. There are specific requirements to do this, but it is beneficial because you can defer recognizing a tax gain. If you dispose of this "new" property that you exchanged for in a typical sale transaction down the road then you would potentially have a tax gain. A benefit here is that while the property has to be "like" property all real property is considered like. So potentially you could exchange for a commercial property, an oil & gas working interest, or you may want to have rental property that is in a different area etc. etc.

CYA statement: consult a tax advisor

[ScottJ]

1. As mentioned if its been rental you can't exclude the gain, as it is no longer your primary residence.
2. Your tax basis = original cost + capitalized improvement - depreciation taken. If you have taken depreciation expense over the years you have been renting, and you sell at a gain there is depreciation recapture that is taxed at different (higher) rates than cap gain rates.
3. As mentioned, you could look into a "like kind exchange" under code section 1031. There are specific requirements to do this, but it is beneficial because you can defer recognizing a tax gain. If you dispose of this "new" property that you exchanged for in a typical sale transaction down the road then you would potentially have a tax gain. A benefit here is that while the property has to be "like" property all real property is considered like. So potentially you could exchange for a commercial property or even an oil & gas working interest. You may want to have rental property that is in a different area etc. etc.

CYA statement: consult a tax advisor

Noted on all 3 points, I've got an email out to a tax attorney friend on this topic, but I think like what's already been said here, it may make more sense to continue renting the property.

Now if I can just convince the current tenants to do that...

[TexasT]

http://www.texas1031.com/docs/basic.htm

I think a 1031 exchange is an excellent way to double or triple the monthly take. You just have to fins the right place to put it. I think commercial is way better than residential.

[Chili]

Just one thing I'd keep in mind in making your decision, and this may or may not be a deal breaker depending on the tax implications, if you choose not to sell but the tenants are ready to buy something, you may lose your good tenants. And I am sure that anyone on here who has had rental properties will tell you, you are more likely to replace them with bad tenants than good ones.

$400 a month positive cash flow can disappear very quickly if you run through a couple of shitty tenants..

BTW, what would be the sales price (roughly). That is the only way you can determine if the $1k is a fair deal on the Real Estate agent. You can also consider owner financed.. But more research would be needed to factor that option in.

[ScottJ]

http://www.texas1031.com/docs/basic.htm

I think a 1031 exchange is an excellent way to double or triple the monthly take. You just have to fins the right place to put it. I think commercial is way better than residential.

Perhaps I do have enough equity in the rent-house to consider liquidating it as a means to invest in commercial real-estate. Suffice to say, a It'll bit of homework to prepare for commercial real-estate investing, as the rental-income is not my primary source of income.

Just one thing I'd keep in mind in making your decision, and this may or may not be a deal breaker depending on the tax implications, if you choose not to sell but the tenants are ready to buy something, you may lose your good tenants. And I am sure that anyone on here who has had rental properties will tell you, you are more likely to replace them with bad tenants than good ones.

$400 a month positive cash flow can disappear very quickly if you run through a couple of shitty tenants..

BTW, what would be the sales price (roughly). That is the only way you can determine if the $1k is a fair deal on the Real Estate agent. You can also consider owner financed.. But more research would be needed to factor that option in.

That's right, if they are dead-set on buying, not selling to them puts them at risk as tenants. Sales price would be approx 165k. Hadn't yet thought about owner-financed, will look at that.

[fordracing19]

Dad had several places that are lease to own. After the agreed upon time/payments he sells it for $1. One slum place had a guy there for 10 years then moved. Now he has the same agreement with someone else.

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[ScottJ]

Dad had several places that are lease to own. After the agreed upon time/payments he sells it for $1. One slum place had a guy there for 10 years then moved. Now he has the same agreement with someone else.

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Is his goal to hook a tenant for long period of time, betting that they will eventually move anyway and not get their $1 home?

[butt86]

Ballpark what did you pay for it? Going through the exact situation right now only reverse. And from what we have researched you would not pay the tax on the 35-40k equity but only the difference in sale price vs prior purchase price. So if you bought it for 155 and selling for 165 you would only have to pay on 10k. I'm sure someone will correct me if I'm wrong

[ScottJ]

Ballpark what did you pay for it? Going through the exact situation right now only reverse. And from what we have researched you would not pay the tax on the 35-40k equity but only the difference in sale price vs prior purchase price. So if you bought it for 155 and selling for 165 you would only have to pay on 10k. I'm sure someone will correct me if I'm wrong

Paid 135k, so about the same difference.

[aggie97]

so explain to me WHO actually tells the IRS he made a capital gain because I am sure the title company does not know what he bought it for, has into it or what amount of depreciation he has claimed. All they can do is say he sold it and got a check for $X.00

I suppose if he gets audited he would have some explaining to do but why would he tell the IRS anymore than they SHOULD know?

[jakesford]

so explain to me WHO actually tells the IRS he made a capital gain because I am sure the title company does not know what he bought it for, has into it or what amount of depreciation he has claimed. All they can do is say he sold it and got a check for $X.00

I suppose if he gets audited he would have some explaining to do but why would he tell the IRS anymore than they SHOULD know?

Let's say you get a 1099-s from the title company, it will report your proceeds as well as the address of the property you sold. If you have been properly completing form 8825 to report your rental income/expenses you will have been providing the address of the rental. You've given the IRS an easy way to match up the fact you've sold a rental property. They will know if you've taken depreciation over the years ect. Now you could lie about your basis but if you get audited then you will have to substantiate your basis, and you just filed a fraudulent tax return which is a whole other can of worms.