The IRS rule is that if you lived in it for 2 of the past 5 years you can claim it as personal residence exempt from capital gains tax.
If you want to plow the equity back into an investment property while the marktet is at a low point, that is probably a good use for the money.
The problem with keeping your former residence as long term rental is that you potentially lose the capital gains exemption after it has been a rental property for over 3 years.
I would suggest you do the following math with your agent and your tax advisor.
1. What are the costs of selling ? Commission, escrow fees and the like.
2. What is the projected capital gain for the house.
3. Using the lower of your personal marginal tax rates and the federal and state capital gains rate calculate what the tax would be if you sold it without the exemption.
If #3 is greater than #1, selling now might be wise even if it means you have to go out and shop for another investment.
If #1 is greater than #3, and your rental property provides you with a break even or positive cash flow when rented (and tax write-offs, and future appreciation) then it makes sense to keep it.
Have a Realtor prepare market analysis of the property to determine how your property compares to others in the current marketplace so you can make an informed decision. Once you see the numbers you will be able to make a determination if the profit of the sale, if any, is something you would be happy with.
Talking with your tax advisor and a Realtor should help you make a sound, and informed decision regarding the sale of your property
The most important aspect of owning investment or income property is to have a financial plan. What is the income you are getting from the property? How much is it costing you per year and month?
What is your exit strategy? Would you just cash out, or are you going to roll it over to a new income property by doing a 1031 exchange, and avoiding the taxes? These questions and many more, as well as the comparable value of the property are very important questions to ask.
You must have a plan, and make your moves accordingly. Perhaps it is not the most opportune time to sell, but if you are going to buy another property with your proceeds, this could be an excellent time to buy. Consult with a Realtor, talk to your accountant, and/or tax consultant to arrive at the right decision for you.
As far as I know San Francisco in the next 2 years will have around 2.1% job increase. So that means the renting market will be good. The market will have a good chance in early 2009. We don't have the crystal ball to see all the unseen future but according to National Realtor Association, we believe that there will be more positive sights in 2009
I would suggest you contact a couple of local Realtors to get their opinion of the current market value of your home. They can then give you a net sheet showing you approximately what you'll end up with after the expenses of sale. This should help you make your decision.