Rental Properties
Sell vs. Maintain
Why selling income producing rental properties and investing in the market might be beneficial.
Provides Liquidity
Even after paying closing costs and the taxes associated with any capital gains or depreciation recapture, you will likely pocket a nice chunk of change that can be used at any time for any purpose. Alternatively, tapping into the equity of your rental property can be costly, time-consuming, and confusing.
Less Hassle
Being a landlord can be frustrating and time-consuming. By selling your rental, you can enjoy the equity in your home while making your retirement less stressful.
Vacancies/Evictions/ Repairs
A major disadvantage of keeping a rental is the risk of vacancies and large repairs. If you don’t carry enough cash reserves to cover yourself in the event of vacancies, evictions, or large maintenance costs, maybe it is time to part ways with a rental property.
Depreciation Recapture
Depreciation recapture is the gain realized by the sale of depreciable capital property that must be reported as ordinary income for tax purposes. The longer you rent a property, the more depreciation recapture and tax you will owe down the line. While having a rental property can offer tax breaks in the near term, you may just be creating a larger tax problem down the road.
Maintain Rental Property
(Example Only)
3.00% ($7,500/year) cash-on-cash return with annual income indexed at 1.00%
Income illustrated is net after expenses. All income is fully taxable
Real estate property value worth $500,000, grows at 3.00% annually
Mortgage of $250,000, 3.50% interest, monthly payment of $1,123
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Sale of Rental Property
(Example Only)
Rental property is sold in 2022 for $500,000.
Mortgage of $250,000 is paid off
Transaction costs to sell are $25,000, or 5% of sale price
Proceeds of $225,000 are invested in a 50/50 stock/bond portfolio with an expected rate of return of 6.72%
Taxes are paid on $75,000 of capital gains and $50,000 of depreciation recapture resulting in about $31,000 of additional tax (federal + California state)
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