Sell Home Or Keep

Personal Finances Credit Cards and Consumer Debt
1

Hello all. Posted this questions a while a go but didn’t have numbers straight.
I am married 49 yrs old with a 2 yr old. My wife doesnt work.
I make about $185k year.
We have just about $85k in cc debt and personal loan debt. $40k of it being a HELOC adjustable rate.
We own two homes.
One is a rental right now that profits us about $600 month after mortage, taxes, etc. Not including any maintenance.
We owe $285k on the house and could sell it for about $550k
The primary home we live in has a mortagage of about $270k and is worth about $700-$725k.
I have about $800k in my 401K.
I hope to retire by age 65.

Would it be smart to unload the rental or primary home. I know we would have ot move into something else but it’s a 5br and we could def down size but another home, even smaller, would be ~$500k.

Thoughts. Thanks very much.

2

Hi @mstrlucky74,

I would ditch the rental. It should raise cash to knock-down or pay-off your HELOC & CC’s.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)

2 Likes
3

With that much in CC debt/personal loans( I’m guessing with high rate) I agree
with Gene. Sell the renal and pay off the highest rate loan you have.

Paul

2 Likes
4

I forgot to mention that in the house we’re living in we’re finishing the basement and making an apartment and would bring in 1600 a month so essentially with the rent I get from the rental and the apartment in our primary house it would pay both on mortgages with about 500 left over excess

1 Like
6

A financial advisor can give you estimates on your social security and pension values based on what you have already done. You are doing great by the way. Most will see you and talk about these things for free. They do want your business ultimately. I repeat you are doing great. You should pay that debt down fast if you can. You are working 15 more years and should be worth more than 2 million maybe 3 when you retire. Your financial situation is complex. I would suggest talking to a major financial advisor like Fisher Investments or similar . You are way ahead of the game at your age. A professional will give you solid advice. You need solid advice IMHO…doc

1 Like
7

So you are getting $7,200 a year return after expenses on something that’s worth $550k. That’s a 1.3% annual return. I think you can probably do better if you sell, not to mention you could pay off your debt, even after paying the taxes you will owe on the sale.

You can hope all you want, but if you don’t have a plan to get you there, your hopes are likely to be dashed and/or your retirement will not be the lifestyle that you are hoping for. You need to work on a plan for paying off your debt, living below your means, maxing out your 401(k) and then investing in addition to your 401(k).

AJ

4 Likes
8

Like AJ said. You’re getting a really low yield on capital. You could sell the rental, use the after-payoff proceeds to pay off the credit cards (close to 30% interest!) and use the remainder in solid REITs for 7-8%. Or even int-term Treasury funds for 4%+.

As well, at your age with a 2 year old you might not want to spend more time managing your rentals than with your kid. “Invest first at home…” as the saying goes. And with that mass in your 401K already you probably don’t NEED to work to 65, at least full time - but you will need to pay for college (if that’s the kids path) in 16 years.

3 Likes
9

So my wife doesn’t want to make a knee/jerk reaction and sell the house without doing the analysis as to whether it makes financial sense.

How do we go about determining, being as close as possible, whether holding the house for another 15 years and selling or selling now and factoring in our $80k in debt. Thanks a lot.

10

You are well on your way to financial freedom! What I missed in the comments are the tax ramifications of owning rentals. I now own three rental SFRs that bring in income and are tax write-offs. A low return is correct, but it is with the taxes savings and the principle payments, it works out. I live in California which has Prop 13, important. When I am older I will sell the home I am living in and move down to one of my rentals, tax free. With the tax laws, I will be fine and by that time everything will be paid off. When my wife and I die the houses will get a new market value and my kids will get them. They will sell them and party, dam. By the way, Roths work very well for buying houses (when you are over 55). You must remember that the price of your rentals will go down and up with the market where rents will be somewhat stable. You look like your doing well so buy another house or units when the market implodes, it will.

2 Likes
11

I would point out that houses generally appreciate at/near the rate of inflation. The Fed’s inflation target is 2% So adding that to your 1.3% yield (probably overestimating because you aren’t counting maintenance costs), that gets you a rate of return of 3.3%

How did the debt go from $85k in your first post to $80k in this post? Did you pay it down in the last day, or are you just guessing at how much debt you actually have?

How much debt did you have 2 years ago just after you took out the HELOC?

If debt back then was more than the $80k (or $85k), then you have paid down some debt. Divide that amount by 2 and that’s how much debt you are paying down each year. Divide your current $80k (or $85k) by that number, and that’s how many years it will take you to pay off your debt.

If the amount of debt you had back then was less than the current $80k (or $85k), then you are digging a larger debt hole each year. Until you stop digging, you’re not going to pay off your debt.

I will point out that if you are making $185k, even assuming that you maxed out your 401(k) contributions in 2022 at $20,500, that means that if you are living a $164.5k a year lifestyle. (You can adjust down by the average amount if you paid off debt, or adjust up if you are adding to your debt.) If you want to retire by 65, you have 16 more years.

In 16 years, at 2% inflation, a $164.5k lifestyle will cost $225.8k. Based on the 4% rule, that would mean that you would need to have $5.646MM in your accounts to retire at 65. How are you going to get there?

AJ

4 Likes
12

You are also missing the tax impacts of recaptured depreciation and capital gains taxes when you sell the rentals.

You are assuming that the tax laws on step up and capital gains will stay the same. Given the proposals that I’ve seen, and the amount of debt that this country is in, I’m not sure you’re making a good assumption.

Based on the SECURE Act requirement to liquidate inherited IRAs within 10 years of the owner’s death and the fact that recapturing depreciation (that didn’t benefit the Roth account) will generate UBTI upon the sale - forcing the Roth account to pay ordinary income taxes at the trust rate on that UBTI - I would strongly disagree. Plus, there is no step-up in value on assets in a retirement account.

Edited to add:
And that doesn’t even account for the fact that because of self-dealing, you must hire out ALL work for/on the property, including management of the property, the Roth account must pay for all expenses, that mortgages for properties held in a Roth account need to be non-recourse, and you cannot transfer ownership of a property that you/your family members already own into a Roth account.

AJ

5 Likes
13

I would disagree. Unless the OP has substantial other investments that he’s making in addition to contributing to the 401(k), the $800k in the 401(k) and future 401(k) contributions are likely not going to be enough to continue to fund his current level of spending. He makes $185k/year plus has an additional $7k or so from the rental. Yet, he currently has $80k - $85k in debt. I don’t remember how much debt he had 2 years ago, and those posts are no longer accessible, but I don’t think he’s paid down much, if any. That means he’s spending most of what he’s making, and possibly more. And his kid is only 2 years old, with a SAHM, so he presumably doesn’t need to pay for childcare. Especially in that case - they don’t get cheaper as they get older, which means that his lifestyle expense is only going to increase if he doesn’t change something.

AJ

5 Likes
14

If you don’t count the mortgage, it profits you even more. :wink:

Seriously, you need to know what the maintenance costs are to know how much profit you’re making. Maintenance should be fairly easy to estimate, as it would include things like monthly landscaping or cleaning, periodic things like furnace filters or water filters. In general, ongoing expenses that are needed to keep things working properly.

However, I suspect I’m using a different definition than you are. I suspect you really mean repairs, which are one time expenses that crop up - usually due to some kind of failure. It’s important to estimate those repairs as well. They are a real cost and will skew your thinking quite badly if you skip over them.

One way to estimate is to go back through your last several years of tax returns and see what your repairs have been. Total them up, divide by the number of years in your sample, and you’ve got some kind of estimate. I’ve also seen generic estimates of repairs that are something along the lines of “x% of the purchase price” per year. While very generic, it’s still better than ignoring the expense.

–Peter

2 Likes
15

AJ you sounds like a tax guy!

SECURE Act, sorry I did not hear about this and I don’t know about it. I do not hold any rentals within a retirement account.

As I understand it, the money you take out of a ROTH is free and clear when your over 55?. They (IRS) has not comeback on it and it has been over 10 to 15 years. After reading my comment I should have been clearer. Taking money out, not putting Real Estate in, sorry.

Yes, you must repair, fix and replace, it is part of ownership. As noted all repairs are write-offs but at a cost that will lessen your income. Sometimes at a great cost, roofs and exterior paint as good examples. Your rents should cover this.

Something you might consider is principal payments. Don’t forget what you pay principle with your loan. Add this to your total return.

Yes, recapture depreciation and capital gains when you sell your rental are a big factor. I am not planning to sell my rentals. When I sell my home/house then move into one of the rentals, there will be no taxes on this. I think you have to own and live in the house for 4 years. The tax code will have much more, please read.

I agree the taxes for the rentals will kill me. My plan is to die before selling. Death is the only way to get out of taxes.

Management, ~6%, it is a cost, but I live close so I don’t need management, yet. When I get older, maybe. When you own few rentals and live nearby, why management? I have the time and the skill.

Future events are always something to think about. I don’t think they will increase the cost/taxes on property. The government will like to change it but they don’t want to p-ss off the big guys.

My rentals are in California, near the coast, they have appreciated to the extreme. They will decline in value with a decline in the economy. I expect this, I do not like it.

Where else can you put your money and make money? I’ve had stocks and bonds, they tax you. I do like retirement accounts but they hit you for taxes when you take it out and you better make the correct choices. Real Estate is taxed when you sell and when you rent but you get income and a good write-off (20 years). If you never sell your Real Estate you wont get taxed and you get any write-offs. Additionally when you die it gets revalued for your child/children.

Inflation, 2% na, say 6% which I think is low. The goverment said 4% , go to the store, get a new loan, buy a car all well above 4%. What I really don’t understand is 2% inflation, why not 0% with a 2% difference? This is just a hope. I lived with 13%, 6% is still low.

Sorry for any misconceptions I provided.

Chas Hage

1 Like
16

Not really - I just play one on TMF. I have been a volunteer tax preparer for AARP Tax Aide.

That’s the law that changed RMD ages and distribution requirements for inherited IRAs.

Sorry, that’s not correct. Qualified distributions are tax and penalty free, but to be a qualified withdrawal, the account has to have been open and funded for at least 5 tax years and you need to at least 59 1/2, disabled or dead (so it’s actually your beneficiary taking the distribution.) If those conditions are not met, then you have to go through the ordering rules that can be found in IRS Pub 590-B 2022 Publication 590-B (irs.gov)

I’m sorry - that’s not clear at all. Real estate can be purchased in either a Roth or a Traditional IRA. But that doesn’t mean it’s a good idea.

Rental income from real estate is not considered compensation and cannot be contributed to an IRA, unless you are a real estate professional.

So, I’m not sure what you are suggesting is possible with rental income, but the things that I can figure out that you might be suggesting both seem to be bad ideas, at least to me.

If the IRA owns the property, the IRA is what needs to pay all of these expenses. As the owner of the IRA, you are prohibited from paying for any of these expenses out of your pocket - that would be considered an excess contribution.

Not exactly. There is an exemption for up to $250k (if single)/$500k (if MFJ) in capital gains when selling your principal residence. You have to have lived in the house for 2 out of the last 5 years to qualify for the exemption. If the capital gains are more than the exemption, you will still have to pay taxes. If the house has been previously used as a rental, you may not be able to use all of the exemption, as recaptured depreciation needs to be accounted for.

Yes, I would suggest you do so, since you seem to be misunderstanding many of the tax rules.

Under the current rules, your heirs can get a step-up in basis on your death. If they sell shortly after your death, they probably won’t owe much, if any, in taxes. But that doesn’t mean that the current rules will stay in place. That was my point - hoping to get out of taxes by dying may not work if you don’t die when the current rules are in place. There have been several proposals that would change that rule.

I will reiterate - the Fed target is 2% inflation. When you look at the average inflation rate since, say, 2000, it’s been close to that. The recent high rates are offset by some years of deflation and many years of inflation that was close to 0%

Edited to add:

Take a look at what happened to real estate when the Tax Reform Act of 1986 eliminated many deductions for rentals.

AJ

2 Likes
17

I have to be honest . I’m even more confused by all this. My wife thinks it may be a bad decision to sell the house. Based on no facts really. Lol

18

I will go back and ask you again.

What was your HELOC/credit card debt 2 years ago? What is it now? If you have paid off little, if any debt in the last 2 years (or even worse, added debt), why do you think that keeping the house and continuing to not pay off your debt is a good idea?

I would suggest to you, at your income level, you should easily be able to pay off $80k - $85k in debt in less than 3 years, just by ensuring you weren’t wasting money. If you were really aggressive about it, you could pay it off in less than one year, without selling the rental house. But that would probably require some changes to your lifestyle. If you don’t want to change your lifestyle at all, then you need to access the equity you have in the rental house by selling it, pay off the debt, and make sure you save up for projects/purchases ahead of time so you don’t have to go into debt again.

AJ

2 Likes
19

Can’t thank you enough AJ…and everyone else on here for the advice/insight.
Well we had no Heloc 2 hrs ago and the ccdebt/personal loan was about $25k.
A year ago we bought the house we are in now. It was a foreclosure and required a lot of work….thus came the Heloc to gut the house and renovate…some cc used as well.

20

So the fact that you’ve been adding to your debt, rather than paying it off shows that you have been living above your means. Is the current rental house the one that you lived in before you moved to the house you’ve gutted? If so, I would urge you to consider selling before you’ve been out of the house for more than 3 years, so you can claim the exemption on the capital gains taxes. If you have owned and lived in the house for 2 out of the 5 years prior to closing, you can exempt up to $500k (MFJ)/ $250k (all other filing statuses) of your capital gains from taxation. If you wait until more than 3 years after you move out to close on the sale, none of the capital gains will be exempt from taxation.

I will point out that continuing to pay minimums on the HELOC and credit cards will keep you in debt well into your retirement, so if you decide to keep the rental house, you need to buckle down and make changes to the rest of your lifestyle in order to pay the HELOC and CC debt off.

AJ

4 Likes
21

When I retire from my union me and the wife receive lifetime medical insurance which I guess helps.
Also I’ll have a pension and annuity.

Pension won’t be much …maybe about $5k month .

1 Like