Selling rental home creates challenges and opportunities

Dear Property Guy:

I am about to sell a rental home in So. Cal. It is worth about $1.2M and has appreciated about $600,000. It used to be my primary residence but has been a rental for a couple years now. I don’t want to take the huge tax hit by selling it, but I understand that I could sell it

for another rental property and not owe taxes. I could use it to take out a couple hundred thousand to reduce the payment on our current house. What should I do?

— Taxed out…

Dear Taxed:

You have a lot going on here. And many options. So let’s knock them out in order:

A home that has been your primary residence two out of five years is elibigible for a $250,000 capital gains exemption, ($500,000 if filing jointly). So it seems, you have the option to shield that much from capital gains if you sell outright.

If you choose to use the entire proceeds of your sale to purchase another rental (also called a 1031 exchange), the whole process is tax-free. Provided you put the entire amount, including any debt, into new rental property. If you don’t reinvest the entire amount, anything you hold back (called “boot” for some odd reason) is subject to taxes.

So your choices are to sell it, take the capital gains hit, and do with the money as you choose. Or 1031 all or part of the proceeds, and reinvest in other qualified rental property.

There is no right or wrong answer here. Your tax professional and/or financial advisor can provide a clearer picture of the exact financial implications.

But, as a very wise CPA once told me, “Don’t let avoiding taxes drive your business and life decisions.”

The message there is that your money is there to serve you. Make the decision that brings you and your family the most peace and joy.

As an aside, your scenario is not at all uncommon. Out-of-state money has been one of the key drivers of the runup in Central Oregon real estate prices. For as expensive as it seems to us, Central Oregon is still a bargain to outsiders.

— Mike

Dear Property Guy:

We are selling our Sisters home and retiring to a land with warmer winters. We’re not bringing our furniture with us, and I know it would be a huge added value to whoever buys our house. My wife disagrees and wants to have a big garage sale, which seems like a huge hassle. What do you think?

- Selling in Sisters

Dear Selling:

I think you should listen to your wife.

I really wanted to end the column with that one sentence, but I was curious myself. So I reached out to our business partner Cheryl Dean, who is an expert on staging homes.

Cheryl says, “Houses sell best empty or with minimal furniture. People want to imagine their own touches in a home. Also, selling a house furnished normally doesn’t add anything to the final sale price.”

Perhaps consider donating nice stuff to a local charity. You can do a kind deed and enjoy some tax advantages.

Which brings us right back to where we started about the whole listening to your wife thing.

— Mike

Mike Zoormajian is principal at WetDog Properties in Sisters. Providing local real estate, property management, and investor services. Questions and comments to: [email protected]. Free legal advice is worth what you pay for it. Consult a real attorney before doing anything crazy.