Should I Sell my previous home or keep it?
I’m often asked by clients whether they should hold onto their prior home when purchasing another or should they sell it. The answer, like so many others, is “it depends”
The main reason most people sell their prior home is they need the proceeds from the sale for their next purchase. However, is that is not the case, it may make a lot of sense to hold onto the home as an investment. You should be aware of several factors that may influence that decision:
- The type of financing on your current home: Financing is much easier and less expensive on your principal residence then on a rental. If you have good long-term financing in place, it will make more sense to keep the property as a rental. If your current financing is short term or if you need to take some money out of this home for your next purchase, you would be better off refinancing BEFORE moving.
- Capital Gains Considerations: Current law allows you to deduct up to $500,000.00 in capital gains for a married couple ($250,000.00 for a single person) with no tax liability on your principal residence. The law says that, to qualify the property as a principal residence, you must live in it 2 of the prior 5 years. If you move and convert it to a rental, you have up to three years AFTER moving to sell the home and still get your capital gains deduction. However, after 3 years, the tax “basis” of the home becomes your original purchase price. As an example, say you bought your home for $200,000.00, and, upon purchase of your replacement home, the value is $500,000.00. There will be no capital gains tax if you sell within 3 years of your new purchase. However, if you hold more than 3 years after moving, you will be responsible for capital gains tax on the $300,000.00 gain. At the current 20% capital gains tax rate, you will owe $60,000.00 to the IRS plus an additional amount to the State of California.
There are many other considerations, salability or rentability of your home, tenant-landlord issues, maintenance, and others that may influence your wish to keep your previous home as a rental.
As always, please call 949-500-6365, email FrankDiLauro@cox.net, or reach us through or web site WWW.FrankDiLauro.com BEFORE proceeding. We can help you make the right decision for you and your family.
