Would you sell?

[Pamela H in Texas]

So we have a home we bought a few years ago.  The market here is beyond hot.  Many homes in our subdivision are being listed for $50K plus more than they would have a year ago (our own home is more like $70K more) PLUS they are going for 3-10% more than list price.  Additionally, due to family circumstances, we have been renting a bigger home (and bigger payment) this past year and will be here another year, at least.  We have rented out our home for a little less than the mortgage (includes taxes, insurance, etc).  Additionally, we don't believe we can move back to our home due to family dynamics, we really need one more bedroom.

So, our realtor outlined what a couple "what ifs" look like.  One gives us about $60K after all is said and done.  The other gives us almost $90K net.  Both would probably be true if we put the upgrades into the house also.

It seems like we should "strike while the iron is hot."  The plan would be to bank the proceeds for a year, probably more like two or three until the market evens out, then buy at that time.  In the meantime, we'd rent though hopefully a little smaller place as one of our "bounce back kids" leaves again (the other already did)

Any opinions or things we should consider?

(note: we would give renters the legally required notice.  Our realtor is more than willing to help them find another place.  Or they could use their own realtor (I know the realtor they used before and he'd gladly help them also.  I feel bad about having them move after just a year, but I feel this might be our best chance.)

[mommyoffive]

Sounds like a YES to me.  You don't live there and don't think you are going to move back.  Unless you could add a bedroom to the home to make it work for you. 

[prairiewindmomma]

You’ve owned long enough to deal with the capital gains? 
 

I’d be inclined, personally, to raise the rent to meet expenses if you live in the Austin or San Antonio metros. Lots of tech jobs going there and that market is going to continue to appreciate. If you are in west Texas or in a rural area, then yes, sell while it is hot. 

[Bambam]

I would. Provided I had some clause in the lease for my current renters that allows me to sell the house. Potentially hard on the renters, but that's the advantage of owning your own  home. 

Any chance your current landlord might sell the house you are renting? 

[Pamela H in Texas]

We are just north of a major suburb of DFW if that matters.  Its not really rural any more. Obviously summer should be even more hot (haha) because people want to get in a new home before school starts. Homes are selling in an average of 7-10 days.  Some are 3, two have been 30 because they were extra greedy in their original ask.  

I have NO idea about capital gains.  I'm gonna have to google that (and then talk to our realtor).  I'm sure he would have brought it up if it were an issue, but always better safe than sorry.  

[Pamela H in Texas]

2 minutes ago, Bambam said:

Any chance your current landlord might sell the house you are renting? 

Wouldn't THAT be something.  As far as I'm aware, no.  When it was on the market previously, he had some crazy idea on what the house was worth without upgrades.  However, considering the market and how quickly the house next door sold (first weekend on market), he'd be smart to at least consider it. I'm not telling him that though!

 

[prairiewindmomma]

This is technical reading but:

https://www.recenter.tamu.edu/articles/technical-report/Texas-Housing-Insight
 

Honestly, I would be polling a few realtors on a market analysis. You could easily be leaving $20k on the table with wrong pricing right now. It is precisely the people who aren’t Uber wealthy who should be making sure they are managing their real estate deals tightly.

Is your realtor with one of the bigger agencies with the pricing software? We saw a huge difference in market analysis when we stick with Coldwell Banker or Keller Williams compared to Larry the local guy, iykwim. You will know your area best, but you want someone who is higher volume and pricing well. 

[prairiewindmomma]

https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax

[Random]

14 minutes ago, prairiewindmomma said:

https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax

^This, and especially this:

The bad news about capital gains on real estate

Your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:

• The house wasn’t your principal residence.

   

  At a minimum you'll repay depreciation.  Make sure you talk to your CPA before you sell.  Good luck!

  https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals

   

[prairiewindmomma]

26 minutes ago, Random said:

^This, and especially this:

The bad news about capital gains on real estate

Your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:

• The house wasn’t your principal residence.

   

  At a minimum you'll repay depreciation.  Make sure you talk to your CPA before you sell.  Good luck!

  https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals

   

Right, but if she still hits 24 months within 5 years because they have only been renting for a year.... https://www.irs.gov/publications/p523

She has to figure this out. And, yes, I guess that would sway me towards selling even if you were in a hot market IF you can't afford to keep it as a long term rental. My point about the rental is that it could be an income property in retirement. Depending on how quickly her area is appreciating, it may be well worth it to pay the capital gains tax if she can hold for a long while and really stack up the appreciation. She should also have her rental income exceed her expenses sometime soon as well.

[Katy]

If it was your principal residence previously and you moved for work the capital gains aren’t a thing to worry about. I think.  That’s what we were told anyway. 

[prairiewindmomma]

1 minute ago, Katy said:

If it was your principal residence previously and you moved for work the capital gains aren’t a thing to worry about. I think.  That’s what we were told anyway. 

You have to move a certain distance.  The new job has to be at least 50 miles from your previous work place.

[SDMomof3]

..

 

Edited May 25, 2021 by SDMomof3

[Pamela H in Texas]

2 hours ago, prairiewindmomma said:

Is your realtor with one of the bigger agencies with the pricing software? We saw a huge difference in market analysis when we stick with Coldwell Banker or Keller Williams compared to Larry the local guy, iykwim. You will know your area best, but you want someone who is higher volume and pricing well. 

He has been in the business a very long time, does this full time.  And yes, he is with a very large agency.

[Pamela H in Texas]

1 hour ago, prairiewindmomma said:

if she still hits 24 months within 5 years because they have only been renting for a year.... https://www.irs.gov/publications/p523

We filed with the tax office that we only planned to be away from our home two years so it still is considered our principal residence.  That was true when we said it.  It just seems it can't be true long term due to the needs of our family (disability). But if it came down to it, we'd make it work temporarily.  But what if the market isn't so awesome in a year or two? Seems like it has to change sometime (either bust or even out).

So the hope is that the market is so hot to make getting out from underneath the house a possibility.  Due to bad choices and how the rental market was last year, we are slightly upside down on the rental.  Getting out from underneath a house that can't pay for itself, especially if anything goes wrong, and we would find difficult to live in just makes sense, especially since the market is crazy good for sellers right now.

Edited May 25, 2021 by Pamela H in Texas

[Pamela H in Texas]

I really appreciate everyone's thoughts.  It gives us things to consider as we go into this. 

[Carol in Cal.]

TALK TO YOUR TAX PERSON.

Find out exactly what you would pay in taxes to do this, and whether waiting would reduce that.  And how long you would have to wait to reduce that.

Also, get market estimates from at least two realtors and go look at at least the outside of the comparables they cite yourself.  Some realtors tend to guess high to attract a seller, and then need to negotiate.  Some tend to guess low for a quick sale.  In those circumstances they would give you some different comparables from each other, all of which may be valid.  Since things are moving so fast right now, any estimate is probably going to outdated really fast, but you need to know, yourself, regardless of what the realtor says, how much you think your home is worth.

Re. the market moving really fast, that can help or hurt in a situation like this.  If it subsides later, then you'll wish you did this now.  But you're giving up your toehold in the real estate market, and if prices continue to climb you could end up needing to rent for a lot longer than you're planning on, and leaving behind some appreciation that you have gotten for your home.  So it can go either way.

[Pamela H in Texas]

Thanks Carol.  That is where we are struggling.  I don't want to leave money on the table, but I don't want to miss our window of opportunity. And you're right.  The difference from January to now has been awe inspiring.  We can't really guess what August looks like. 

I can get another set of numbers from my daughter's realtor.  She lives in the subdivision so that may help. 

But our realtor gave me a few different offer scenarios, examples of what offers might look like. And I know he will hustle, though it seems like the market will do it for him.

[vonfirmath]

6 hours ago, prairiewindmomma said:

You’ve owned long enough to deal with the capital gains? 
 

I’d be inclined, personally, to raise the rent to meet expenses if you live in the Austin or San Antonio metros. Lots of tech jobs going there and that market is going to continue to appreciate. If you are in west Texas or in a rural area, then yes, sell while it is hot. 

Austin's market is so hot -- Its like above national averages.