In 1999, I bought a rental house in California for $270,000. It’s now worth $1.3 million. Should I sell it, and put the money in CDs?

Here are the key details. I’m 73 years old, though I consider myself young for my age. Yesterday me and a couple buddies scootered 15 miles all over San Francisco. I’m a self-employed musician and songwriter, but my income potential has now become passive income except for this rental property.

I bought the property in Thousand Oaks, Calif. in 1999 for a modest $270,000. It was our primary residence. It’s a unique property, originally a hunting cabin from 1938, nestled in a lush, fenced-in compound surrounded by nature, yet conveniently close to amenities. Today, it’s valued at up to $1.3 million.

I refinanced the property at a fixed 2.9% interest rate. Monthly expenses, including taxes, insurance, gardener, and utilities, hover around $3,000. Given the property’s age and history of remodeling, I would put ongoing repairs at $1,000 a month more.

After my wife and I relocated up north, we decided to rent it out. The property consists of a primary house and a guesthouse, which is divided into a 1-bedroom unit and a studio. We’re earning $8,000 per month from long-term tenants. Additionally, we’ve listed the studio on Airbnb
ABNB,
+0.87%,
generating an extra $1,700 per month. That’s a combined monthly income of $9,700, excluding expenses. My wife and I split the property, 80% me and 20% her.

There’s a crucial tax consideration: we have until July 2024 to sell and take advantage of the $500,000 capital gains tax exemption. Our potential tax liability, factoring in depreciation and investments in improvements (approximately $250,000), may amount to roughly $100,000 if we sell before July 1st, 2024.

On the positive side, the property provides excellent income potential and the promise of appreciation, given its location in an upscale area undergoing improvement.

My wife is still working, earning $125,000 annually, with an additional $24,000 in pension. When she retires, she’ll receive $3,000 in Social Security. On my end, I receive a modest $950 in Social Security, alongside roughly $1,000 per month from song royalties and an additional $1,800 per month in interest from Treasury bills and CDs, which yield an average return of 5%. Therefore, rental income plays a significant role in my overall income.

Currently, I’m managing the property, coordinating repairs, rent collection, and bookkeeping. We’re fortunate to have a reliable handyman and a competent realtor on standby for tenant turnovers. Fortunately, our tenants have been excellent.

I also own a vacant piece of land next to the property, conservatively valued at $125,000. It’s debt-free and will be sold alongside the primary property whenever that sale occurs, though there will be capital gains tax associated with it.

If we decide to sell and invest the proceeds in 5% Treasury bills or CDs, we’d generate approximately $3,000 per month in income. However, this income would be taxable since we would lose the property-related deductions.

Future property expenses need to be factored in, such as a new roof and HVAC unit for the guest house, totaling $18,000, along with additional improvements estimated at $8,000, which are presently known.

Should I opt for a property manager, they would charge 8% to 10% of the rental income, impacting our overall income?

Some of the reasons why I want to sell is because property maintenance is an ongoing concern, as well as the risk of tenant issues. The property relies on a septic system and water booster pumps for water pressure, making it susceptible to maintenance issues.

My thinking is if my wife and I stay together we will be fine, but if she was gone, I would need this income. We are planning on staying together but things happen. I also have a son with a mental illness, and I’m now starting to have to give him more money to be able to live.

So my question is, do we sell or do we keep?

Young at Heart

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at [email protected].

Dear Young,

Hold onto this rental. This property sounds like a great investment and continues to appreciate, so why sell in pure fear of incurring a tax bill? 

You’ve got a fabulous mortgage rate, and the monthly expenses and repairs aren’t over the top. Plus, you’re making $8,000 from great tenants, on top of earning extra income from putting part of it on Airbnb. Why rock the boat?

Yes, you have a tax deadline of July 2024, and you are trying to minimize how much you pay the government, but do you really need to sell the home and use the profits of the sale right now? You could invest the money into Treasury bills or CDs, but as you note, any money you make from those investments will become taxable income.

I understand the problems associated with being a landlord. Maintenance costs can be expensive. You need to spend more money on a new roof and such. But $18,000 in future expenses is a little less than two months’ income from the rental. And it ensures that you can continue to rely on this income stream in the years to come.

Managing the property directly can help you preserve more of this income, versus hiring a property manager for it. Since you only own one property, it may be less expensive to just continue to do it yourself. People who hire property managers generally have multiple units, but keep that option open. It may be worth it as you get older, and don’t want to deal with emails and phone calls from your tenants.

Ultimately, your wife is still working, so you don’t have to make any immediate moves. You are not strapped for cash in the event of an emergency. 

If and when your wife inherits this property, she would inherit the property and benefit from a “step-up” in basis. Your wife and/or son will inherit ownership of the property at its current million-dollar market value. So they won’t have to worry about the significant capital gains tax that you could potentially incur by selling after this deadline.

Finally, having the rental income would protect you in the event of you and your wife breaking up, like you mention.

If you want to give your son more money to be able to live, perhaps you can increase rent on your short- and long-term leases and allocate more money towards his living expenses. 

The bottom line is that you should not consider selling as a knee-jerk reaction to an upcoming tax bill, since you are not pressed for that money at the moment.

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