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My 88 yr old Father, is considering moving from the San Francisco Bay Area to our retirement community in So. Calif. His paid off home is in a very desireable area on the peninsula. Property values
always remain high due to location. The house is in great shape and would sell over a million easy. The exact same house next door has been a rental for the past 18 years,and rents a little over $3,000/mo.
A new home in our retirement community runs about $380,000. , and he could probably rent for $1200./mo We have other rental properties, and could easily manage his home in nothern calif. Is it better financialy to have him sell his home or rent it out. Or to buy or rent a new one. We are concened about him losing out on the capital gains. He has a good income from other sources, but thought the rental income at $3,000 would pay for his new home or rental + some. Your thought please. In addition that income could help towards any long term medical expenses he might have in the near future. |
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If your father sells his house for a million dollars, he can take the first $250,000 of his profit free of federal capital gains tax (homesellers exclusion). That leaves $750,000 to be taxed -- probably less, because he subtracts commission, legal costs of selling, and his cost basis, which includes original cost and money spent on improvements over the years. Let's say he has $500,000 subject to capital gains taxes, at no more than 15 percent federal and less at the state level. Total tax bill, perhaps $75,000. Of his million sale price, he ends up with at least $825,000. He could certainly find safe investments for that money that would bring him more than a modest 5 percent a year, at least $41,250. If instead he rents the place out for $3,000 a month, he'll collect $36,000 a year, but less after he pays taxes, insurance, repairs and maintenance (never mind uncollected rents or vacancies.) He'll be getting an income of no more than let's say $30,000. I can't see that it would pay to have the worries and risks of ownership, especially if you're going to be managing it as absentee landlords. Looks to me as if he'll be better off just taking the money, paying the taxes, and investing the rest for income. |
