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Buying a new house. Sell the old one?


Bookman

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Think it's time to buy a bigger house.

I have a new one picked out but I haven't decided how I'm going to pay for it. I can sell my existing house or keep it as rental.

I could buy the new house now, and put my existing house on the market in a few months when there are more buyers. If I move into the new house now, will that affect the Home Sale Gain Exclusion? I doubt it but I guess I should look at the regulations.

Anyway, I'd appreciate any general thoughts/advice.

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I just went thru this.

I chose to rent it out because the price I would have gotten in a sale was not very good and I had room in my financial portfolio for a real estate asset.

For you, it depends upon the market where you are located. Also, depends upon your financial situation and your investments. For a good market like Austin, either decision would likely be fine. Put it up for sale around Feb/Mar.

By the way, I was so unhappy with the performance of real estate agents in the past I got my real estate license and now do discounted deals for myself, friends and referrals from friends. I also try to work with Phil and Thad on the financing packages.

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Most people I know, that bought rental properties, are happy with their decision.   However don't expect it's to make you rich overnight.  

Be sure it doesn't place too big of a strain on your finances especially if the rental house sits empty for a period of time.   Or there is an expected major repair like a new roof.   There is also the decision of do you want to take on the day-to-day management or pay someone else to do it.

The other advice that I've heard is that the tax benefits can be incredible with real estate investment properties especially with some recent changes to the law.

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I say rent it if you can. I backed into renting (short term rental) this year and it’s working out wonderfully. 

Wife said she wanted to move. Looked at dozens of houses over 6ish months. Found one out at Lake Travis we agreed on, and bought it. Did a medium remodel (~60k all in). Then wife decided she couldn’t leave our current house/neighborhood. Put house we night and remodeled on the market, but missed the spring selling season. After 3 months, we took it off and decided to furnish it and use it as an AirBnB. It’s been rented out every weekend except one since we put it there, with several longer stays. It’s covered it’s expenses since October. Never would have been able to afford a lake house without that. 

Obvioisly your situation is different, but definitely made me a proponent of rents property as part of my portfolio of assets. 

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11 minutes ago, hornian said:

I say rent it if you can. I backed into renting (short term rental) this year and it’s working out wonderfully. 

Wife said she wanted to move. Looked at dozens of houses over 6ish months. Found one out at Lake Travis we agreed on, and bought it. Did a medium remodel (~60k all in). Then wife decided she couldn’t leave our current house/neighborhood. Put house we night and remodeled on the market, but missed the spring selling season. After 3 months, we took it off and decided to furnish it and use it as an AirBnB. It’s been rented out every weekend except one since we put it there, with several longer stays. It’s covered it’s expenses since October. Never would have been able to afford a lake house without that. 

Obvioisly your situation is different, but definitely made me a proponent of rents property as part of my portfolio of assets. 

I think that this post belongs on the Stupid Shit Wives Do thread.

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First off, the homestead tax exclusion on the gain is good as long as the house was your homestead for TWO out of the last five years.  So if you think the place will appreciate you could rent it and close the sale any time before the 3rd year anniversary of your new homestead and keep ALL the profit tax free.  You can use this excluson of profit every two years.  If I was young and single I would be moving every couple of years to take the tax free money, moving up again and again.

If you are going to keep your current place to rent you might also look at doing a refi to take out your "tax free" gain and put it toward  improving the new house or other investments.  The advantage here is that your rental house will still hopefully be appreciating in value over time, but your deduction of interest on the note, taxes, depreciation (1/27.5 per year) and any other incurred expenses will likely make you show a paper loss each tax year until you sell. Without a new note you can still deduct the taxes, depreciation and expenses, but the new note would be what will make you show a "loss" as you actully put cash into your pocket. 

here is a good rental calculator to play with https://www.calculator.net/rental-property-calculator.html?cprice=185000&cuseloan=yes&cdownpayment=30&cinterest=7&cloanterm=15&cothercost=3000&cneedrepair=no&crepaircost=10000&cafterrepairvalue=150000&ctax=4800&ctaxincrease=3&cinsurance=3000&cinsuranceincrease=3&choa=0&choaincrease=3&cmaintenance=1000&cmaintenanceincrease=8&cother=200&cotherincrease=3&crent=3800&crentincrease=3&cotherincome=0&cotherincomeincrease=3&cvacancy=25&cmanagement=0&cknowsellprice=no&cappreciation=3&csellprice=200000&cholding=30&csellcost=3&printit=0&ctype=&x=65&y=23

The calculator does not include depreciation but here's one I found on the internet https://www.calculatorsoup.com/calculators/financial/depreciation-property-realestate.php

The math on real estate is mind boggling when the tax treatment is factored in.

 

 

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In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

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17 hours ago, horn4life said:

First off, the homestead tax exclusion on the gain is good as long as the house was your homestead for TWO out of the last five years.  So if you think the place will appreciate you could rent it and close the sale any time before the 3rd year anniversary of your new homestead and keep ALL the profit tax free.  You can use this excluson of profit every two years.  If I was young and single I would be moving every couple of years to take the tax free money, moving up again and again.

If you are going to keep your current place to rent you might also look at doing a refi to take out your "tax free" gain and put it toward  improving the new house or other investments.  The advantage here is that your rental house will still hopefully be appreciating in value over time, but your deduction of interest on the note, taxes, depreciation (1/27.5 per year) and any other incurred expenses will likely make you show a paper loss each tax year until you sell. Without a new note you can still deduct the taxes, depreciation and expenses, but the new note would be what will make you show a "loss" as you actully put cash into your pocket. 

here is a good rental calculator to play with https://www.calculator.net/rental-property-calculator.html?cprice=185000&cuseloan=yes&cdownpayment=30&cinterest=7&cloanterm=15&cothercost=3000&cneedrepair=no&crepaircost=10000&cafterrepairvalue=150000&ctax=4800&ctaxincrease=3&cinsurance=3000&cinsuranceincrease=3&choa=0&choaincrease=3&cmaintenance=1000&cmaintenanceincrease=8&cother=200&cotherincrease=3&crent=3800&crentincrease=3&cotherincome=0&cotherincomeincrease=3&cvacancy=25&cmanagement=0&cknowsellprice=no&cappreciation=3&csellprice=200000&cholding=30&csellcost=3&printit=0&ctype=&x=65&y=23

The calculator does not include depreciation but here's one I found on the internet https://www.calculatorsoup.com/calculators/financial/depreciation-property-realestate.php

The math on real estate is mind boggling when the tax treatment is factored in.

Good advice, thank you. I assume this will affect the mortgage rate I get on the new house?

17 hours ago, horn4life said:

 

 

 

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On 12/16/2018 at 8:23 AM, Bookman said:

Good advice, thank you. I assume this will affect the mortgage rate I get on the new house?

 

I thought about it and the advice may not be good, from a timeline perspective. IF you are going to purchase in the next year. I am not a lender nor underwriter but my understanding is that the lending on your homestead specifically states you intend to live in the home as your primary residence for the next year. So a ReFi would not be advisable if you were going to buy a new house in the next 12 months. I BELIEVE this is the case, and is part of federal banking disclosure in your loan package.  Makes sense as you could otherwise get lower rate mortgages based on a homestead risk, then quickly convert the source of payment of the note into a higher risk rental unit. There MAY be an option for you with a smaller local community bank that hold their own notes, but I think the Federally insured loans prohibit conversion to rental in the first year of the note. Phil or somebody else chime in here?

Since you already have the new house picked out it's most likely going to be, sell the old house and buy the new house.  If you have enough liquidity to make a downpayment on the new home without selling the existing home you could always do a refi on your existing property after closing on your new homestead.  IF you are thinking of going the rent and hold your existing home my only other suggestion might be NOT to make the sort of improvments/updates you might do to sell for maximum value.  Simply because you could do those same improvements once the home became a rental and write off the improvements as straight expenses in that year.

I refinanced out of our homestead and bought a place in Corpus that I am trying to decide whether to rent and hold, or sell.  At this point I figure better to hold it until the spring and sell it.  But if I'm gonna hold then I just need a renter in, and I'll put the new roof on as an expense in 2019 against the rental income and show a fat paper loss, despite the increase in value it would give the property. It's the debate the wife and I are having right now.

I Lurked a lot on biggerpockets.com seeing the answers to other folk's similar questions and situations I thought I would face as a potential real estate investor.  

 

 

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  • 3 weeks later...

I’ve been looking at the same question, and ultimately decided to keep the old place. I had the cash for the down payment on the new place, and the profit I think I can make from the old makes the mortgage payment on the new a wash (vs. lowering it via a bigger down payment). I’ll have an income property and be a little more diversified in that regard, and should bad times strike we can always move back into the old place. It’s worth close to double what I paid for it now so I could never get back into it for that cheap again. It shouldn’t take long to pay off the old place and then I’ll have a nice $2500 per month annuity (whenever it’s occupied of course). We don’t move until April but already have one interested renter just by word of mouth.

 

It sucks parting with that much cash but I feel like it’s going somewhere relatively safe, and I’m already building those reserves back up.

 

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  • 3 months later...
On 12/18/2018 at 2:48 PM, UTPhil2006 said:

PM sent.

As far as rate as long as your buying primary (which you will sign that you intend to occupy as primary residence) residence then you'll get the good rate.  It's investment rates and such where you take a rate hit.

Also of note, you for mortgage qualification purchases, you need to be able to carry both notes, as rental income wont count towards DTI for at least a year.  Had a couple people ask this recently so wanted to bump this

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32 minutes ago, bluto said:

How often do lenders/mortgage cos call out borrowers when the original primary residence home turns into a rental?

never.   

Edit: unless the terms of the loan require owner occupancy, such as a reverse mortgage. 

But, if you bought a home years back, financed it as owner-occupied, and now you want to move and turn it into a rental, you're golden.  If you ever need to refinance, it's a different story though

Edited by Gil Bang
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43 minutes ago, bluto said:

How often do lenders/mortgage cos call out borrowers when the original primary residence home turns into a rental?

What Gil said above. If you’re trying to turn it around in like a month I wouldn’t do it. If you’ve been in it for a good while then yeah you’re golden. 

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