If you are moving to a new city, but currently own an investment property in your (soon to be) former area, it creates an avalanche of complex questions. Should you sell the property or keep it? Do you want to be a long-distance landlord? If you do sell, will you reinvest or pocket the cash?
The answers, of course, are specific to each person and their unique situation. However, we’d like to help you sort through this situation so you can make the best choice for your future.
Moving When Own an Investment Property: How to Decide Between Holding or Selling
Pros of Keeping the Investment Property
This is probably the most easy and convenient option, although easy and convenient are not always the best. By keeping the property and maintaining it as an income-generating rental home, you have one less thing to worry about while moving. You won’t have to deal with finding an agent, listing the home, preparing documents for selling, and all the other small details that can add up to a massive chore.
Assuming you would otherwise sell the old property and purchase a new one (instead of pocketing the cash, more on that below), this choice also eliminates the need to shop for and negotiate a new purchase.
Keeping the property can be more affordable if you need a loan for the new purchase. You won’t have to pay realtor fees and closing costs, which can add up to thousands of dollars.
Downside of Keeping the Investment Property
Being a landlord is tough; it’s even harder when you live far from your rental property. As a nearby landlord, you can respond to problems faster and generally keep a closer eye on the property, which is hard to do if you are hundreds of miles away.
When your rental property is far from where you live, you may need to hire a property-management company. Obviously you can’t do the mowing and maintenance from a distance, so hiring a professional to perform these chores is often required. But they don’t work for free, which means your profit margins could be consumed by the management team.
Moving When Own an Investment Property: Things to Consider
The Further You Go, the More Likely You Should Sell
Everyone’s decision will be different, but generally speaking the further you are from the home, the more likely it is that you’ll want to sell.
If you currently live in one Los Angeles suburb and your investment is in the same town, and you’re moving to a new suburb on the same side of the metro area, then perhaps keeping it would be fine. But if you live in suburban Los Angeles and you’re moving to Boston, it’s almost certain that you’ll want to sell the property. This is not a hard rule, but merely a general guide for helping you make the choice.
Ask Yourself: Would You Buy a Property in Your Old Area?
If you are struggling to make a decision, try looking at the problems from a new angle. Consider this: if you didn’t own the rental property, would you buy it today? If the answer is no (and it often is), then you should seriously consider selling.
Let’s say you currently live in Denver, Colorado, where you own an investment property worth $500,000. But because of changes in your work, you will be moving to Chicago, Illinois. But you simply can’t decide whether to sell or keep the property.
Think of the problem from this angle: if you live in Chicago and had $500,000 in the bank, would you purchase an investment property all the way out in Denver? The answer is likely no. By reversing the problem, you create a new angle that helps you clarify the best choice.
Deciding to Sell Your Property and Reinvest in Another? Use a 1031 Exchange
Section 1031 of the United States tax code allows businesses and owners of investment property to defer the payment of federal taxes if they sell a property and purchase a new investment one.
Essentially, when you sell an investment property and keep the money, the government sees this as the same as cashing out a stock portfolio or other investments. Therefore, you have to pay taxes on the profit. This is the capital-gains taxes that is a high interest to investors of all types.
But when you sell the property and purchase another, you’re not taking out the profit, you’re merely moving your investment cash from one source to another. It makes sense, therefore, that you shouldn’t have to pay taxes until you cash out your property investments.
A 1031 exchange allows you to avoid paying capital gains when you sell the real estate. There are, however, certain rules that apply. Technically, you can’t receive the money from selling your old property, so taking possession of the money at any time could disqualify you from using the 1031 tax deferral. So you’ll need to use a qualified intermediary to coordinate the exchange.
You have to sell the property, but you’ll also need to find a replacement property quickly. Essentially, you have 45 days to identify potential replacement properties, then you have 180 days to close on one of those properties.
You’ll also need to file a specific IRS form to make sure you don’t pay taxes until the transaction is complete.
One of the most important benefits of this tax code is that it’s applicable to properties anywhere in the United States, and it can include multiple properties. So if you want to sell an investment property worth $750,000 and buy three worth $250,000 each, you can. (It also works the other direction; you can use the sale of three properties to buy one, or two to buy three, or however the math works in your situation.)
Find the Right Mortgage for a 1031 Exchange
If you are looking to purchase a new investment property, contact our team today. We have access to a wide variety of mortgage products, including top-quality options for investors, first-time buyers, and even people who want to purchase a vacation property!