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PaperclipPerfector  6mo ago (text post)   1956 thread views

Wellness Wednesday for November 1, 2023

The Wednesday Wellness threads are meant to encourage users to ask for and provide advice and motivation to improve their lives. It isn't intended as a 'containment thread' and any content which could go here could instead be posted in its own thread. You could post:

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Does financial wellness count? Hoping to have some tax-knowledgable folks in here.

Scenario: I have 2 properties.

Property A:

  • 2.75%
  • $300k in unrealized gains
  • Renting for net $1,500 / mo, 1.5 years

Property B:

  • 3.25% ARM (5 years till doom)
  • $0-$60k in unrealized gains depending on how delusional Zillow is on a given day
  • Primary residence for 1.5 years

I plan to divest myself of both properties within the next 5 years and relocate.

I wish to avoid capital gains taxes on the appreciated value on Property A. (I don't care as much about the gains on Property B). This would be 15% of $300k, so around $42,000. From what I see, I can do this two ways:

  1. I sell the house within the next 1.5 years, according to the 2-in-5 rule.
  2. A 1031 exchange later on for another rental property

Tools at my disposal include a parent-owned lakehouse that I could nominally buy and rent, and a decent amount of liquid capital that we both can deploy (along with extremely high trust between parties, as you'd imagine).

It seems like Option 2 is going to be a big pain. I'd prefer to keep renting the house for another 3-5 years instead of 1.5, but based on cap gains that's going to be 28 months minimum of treading water. I also hate losing the cheap money of that mortgage and booting out good renters who would probably prefer to stay in the house another 1.5 years.

In contrast, my second home's rate is... not great. An ARM that is great now and won't be later.

Frank thoughts and reality checks are appreciated.

I'm a bit confused since your "first" property is your rental home, and your "second" property is your primary residence.

Can you rewrite for clarity, perhaps labeling your primary residence as A, and your investment property as B, and then spelling out the mortgage rates and unrealized capital gains in each property?

Done!

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