Should we sell our townhouse in Pasadena before moving to Irvine?

jamlen_IHB

New member
I have been a huge fan of the Irvinehousingblog for a long time but this is only my second post. I read the blog forums daily and learned all the lessons provided by so many and am very greatful for this.



My family and I are dreaming about moving from Pasadena to Irvine for many obvious reasons such as business opportunities, great schools, better proximity to the beach etc. I am struggling a lot with deciding whether to sell the Townhouse where we currently live in Pasadena or keep it as a long term investment and rent it out. Here are some of our facts that provide context if anyone is interested in providing their view (which would be greatly appreciated).



- 1506 sqft 3bd/3ba Townhouse located near Old Town Pasadena, CalTech and South Lake shopping district

- Unit is completely upgraded (did most of the work ourselves) with high end materials

- Bought in 2002 for $310,000

- Value peaked at around $620,000 but could probably be pretty easily sold for around $500,000 right now based on current comps (I know, nothing sells easily today...)

- We provided 20% downpayment for an initial 30 year fixed that was refinanced with a 15 year fixed at 4.875 % in 2003. Current mortgage balance stands at $170,000.

- Would probably be able to rent unit for around $2,500, our current out of pocket with mortgage, HOA and Property Taxes around $2,600 but $1,300 of this is principal repayment.



Our plan is to move to Irvine in the summer and rent an apartment or a house and wait for the market to deflate further so we eventually can buy our long term family home. We do not really need the money out of our Pasadena townhouse for a down payment on the next house as we already have a sizable down payment saved up but I am afraid that prices are going to continue down for the next few years and am thinking about selling to simply lock in our equity of just under $300,000 before it is all gone.



I would greatly appreciate any and all feedback on this topic. My fear is that we love our townhouse and are evaluating this emotionally instead of anaytically so perhaps for others that did not have to sweat and shed some tears ripping out the old kitchen and eating out of tin cans during the renovation, this may be an obvious decision to make and we are just too close to the situation.
 
Sell it now, price it right and try to sell it fast. Just my 2 cents. I'm wondering what you loved about Pasadena and what you think you will love about Irvine (more than the convenience and the schools), they are two VERY different places.
 
Renting your unit out rather than selling seems to be the right move for you at the moment, I would think. Large principal payment, no holding expense, long-term horizon, all sounds like you should be holding onto that unit. And then rent in Irvine until you think market has hit bottom.
 
If you can hold onto the townhouse in Pasadena and rent it out (and don't mind being a landlord)... by all means keep it.



The fact that you are planning to rent in Irvine is a good sign that you know what you're doing.



The only thing is if you don't sell now... it will be a while until you ever sell and once you haven't lived in it for two years... you may have tax implications when you do sell.



The fact that you only owe $170k on it makes it attractive to just hold on... maybe refi into a 30-year to lower your monthly so it can be income property as well.
 
Since you have lived there, you can get out that $300k tax-free (if you are a couple). Once it is a rental for a few years, you will have to pay taxes on it if you sell plus pay back the depreciation you took as a landlord unless you exchange it for another rental (as I understand it, but talk to a tax pro to confirm).



Unless you plan to amass a rental portfolio and become a part-time landlord, I would pick selling it (and focus on your job/life instead), pocketing the money, and invest it in something you don't have to manage (like bonds, etc) for two reasons: 1) It will be a long time before it is worth as much as it is right now. 2) I don't have enough time in my day for job/life as it is, so I personally wouldn't want to have to rent it out, and get the 2 am call that the pipes burst and water is pouring out of the wall.
 
rent your pasadena home.

Do not sell it. Once sold, the state will use the 500,000 as the new tax base to get property taxes.

Your home is prob only using a 350,000 tax base right now.



Why give the state more money. You can rent it with positive cash flow, and maybe one day you can move back....20 yrs later when your kids have gone to college...whatever.
 
[quote author="irvine_home_owner" date=1233719604]

maybe refi into a 30-year to lower your monthly so it can be income property as well.</blockquote>


This was my first thought, but I'm not sure you would be better off. Compare the cashflow against 2.5% on $300k in the bank. Include all costs of ownership and any "hassle" costs. Plus cash is more flexible and less risky IMO.
 
Sell it to take advantage of the tax-free money/windfall. Other posters are correct.... once you haven't lived in it for the last two years...you lose the benefit.



zubs, if he/she sells it, there will be no more property taxes due. (!) I'm assuming you mean "don't re-fi" because that might cause a new property evaluation.
 
I'm just trying to use proposition 13 to it's full extent.

The 2002 price of $300,000 has about a $3,500 property tax a year.

The 2009 price of $321,640.60 has about a $3,700 property tax a year



If the property were sold for $500,000 the tax would be about $5,700 a year.



Are my calculations off? I used 1% appreciation on property for tax purposes with prop 13.



So the new owners would be paying a $5,700 prop tax

If the original owners kept the place, they only pay $3,700 prop tax.



Maybe the $2,000 prop tax isn't big enough incentive to keep a place. But imagine people who bought during the 80's or 90's.
 
Why would he care what the new owners owed for prop taxes? You are confusing me....it won't be any concern of his anymore if he sells.
 
[quote author="zubs" date=1233731148]I'm just trying to use proposition 13 to it's full extent.

The 2002 price of $300,000 has about a $3,500 property tax a year.

The 2009 price of $321,640.60 has about a $3,700 property tax a year



If the property were sold for $500,000 the tax would be about $5,700 a year.



Are my calculations off? I used 1% appreciation on property for tax purposes with prop 13.



So the new owners would be paying a $5,700 prop tax

If the original owners kept the place, they only pay $3,700 prop tax.



Maybe the $2,000 prop tax isn't big enough incentive to keep a place. But imagine people who bought during the 80's or 90's.</blockquote>


Im going to go ahead and say that the current seller should not consider the additional 2K of property taxes CA will get from the sale of his/her house to determine whether he should sell the townhouse and pocket 200-300K tax free.
 
My example came from a friends house which he bought in 1979 for 90,000 and now it's worth about 450,000.

He pays about $1,600 a year in property taxes. If he sells it, the house would be appraised at 450,000 tax base which is about $5,500 a year.



Proposition 13 favors holding on to a house. The non taxable $250,000 gain will still be there if you sell later.



This house worth 300,000 in 2002, and 500,000 in 2009 may be worth 800,000 in 2020.

With prop 13, you can keep it a rental income house for a long time.



If you were to buy a new rental income house, you would be paying that higher tax rate.
 
[quote author="zubs" date=1233802643]My example came from a friends house which he bought in 1979 for 90,000 and now it's worth about 450,000.

He pays about $1,600 a year in property taxes. If he sells it, the house would be appraised at 450,000 tax base which is about $5,500 a year.



Proposition 13 favors holding on to a house. The non taxable $250,000 gain will still be there if you sell later.



This house worth 300,000 in 2002, and 500,000 in 2009 may be worth 800,000 in 2020.

With prop 13, you can keep it a rental income house for a long time.



If you were to buy a new rental income house, you would be paying that higher tax rate.</blockquote>


zubs and all - for clarification:



Capital Gains exemption has a few qualifying rules.

1. The exemption is only good for the first $250K of gains if you are a single filer, and the first $500K if married.

2. You must own the property for at least two out of the previous five years.

3. You must reside in the property for at least two out of the previous five years.

(those two time periods are independent of each other; they can overlap but don't have to.)

4. You must not take the exemption within two years of taking it for another previous property.

So the clock <strong>is</strong> running if this tax implication is your prime motivation.



Also, if you would like to transfer your property tax basis, you can do that one time.

It also has some requirements here... <strong><a href="http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm">Prop 60/90.</a></strong>
 
IR2, I thought that I read that they had changed the residency requirements, such that any time spent as a rental reduced the amount of tax-free income you could take.



Am I remembering incorrectly? I thought that was a change that started in 2009?



Thanks for any clarification!
 
[quote author="freedomCM" date=1233828941]IR2, I thought that I read that they had changed the residency requirements, such that any time spent as a rental reduced the amount of tax-free income you could take.



Am I remembering incorrectly? I thought that was a change that started in 2009?



Thanks for any clarification!</blockquote>


No changes to my knowledge...



The <strong><a href="http://www.irs.gov/taxtopics/tc701.html">Home Sale Exclusion Rule</a></strong> reference from www.IRS.gov (which was last updated on 12/22/08) doesn't show any changes.
 
OK, I thought that you might know off the top of your head.



But I was right. There is a new rule: (http://taxes.about.com/od/capitalgains/qt/home_sale_tax2.htm)



<blockquote>When homeowners sell their main home, they can exclude up to $500,000 in capital gains from income tax. The Housing Assistance Tax Act of 2008 changes the rules. The amount of profits from the sale of a house that can be excluded is now based on the percentage of time when the house was used as a primary residence.



Gain from the sale of a home may need to be allocated between what gain be excluded and what gain is not excluded. The portion of capital gains that cannot be excluded is determined by the following ratio:



Period of non-qualifying use

--------------------------------------

Period of ownership



Time Period of Non-Qualifying Use

For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation.</blockquote>
<strong>

So the old 2 years out of the last 5 rule no longer applies!</strong>
 
Sell the Pasadena place to take advantage of the tax-free gain. If you want to be a rental property owner, just buy it (or a similar property) back in a couple of years when its selling for $350K. Your tax basis would be around the same as it is now so you lose nothing there.



I think a fat chunk of change extracted from RE now and put into equities will return a vast amount more five years down the line... Once the stock market turns, there will be some money to be made. Why keep equity locked up in a depreciating asset when there could be nice gain potential in other asset classes in the near future?



And for what its worth, Pasadena and the surrounding area rocks. Irvine has nothing on it in my book.
 
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