Market Conditions in Alameda>Question Details

Natalie, Home Seller in Alameda, CA

In the San Francisco Bay Area real estate market, should owners continue renting properties or sell?

Asked by Natalie, Alameda, CA Wed Oct 3, 2007

We own a home near San Francisco (about a 20 minute drive) and are unsure if we should sell our property now that our tenants are moving out (before we have to pay capital gains) or continue renting and wait out the slump. We purchased the property in 2003 and it has appreciated some.

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If you lived in the property for at least two of the years that you owned it, you can shelter up to $500,000 of capital gain If a you are a mariied couple. You would need to sell it (and close escrow on the sale no later than 3 years after you moved out.

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.
1 vote Thank Flag Link Wed Oct 3, 2007
Jim Walker, Real Estate Pro in Carmichael, CA
You will need to look at why you purchased the property to begin with. Was it part of your long term financial plan and now you finding you don't like being a landlord? Did you purchase the property solely to hold onto for a couple of years and sell for a profit? Looking at your origional intent for the property and your motivations for selling will be paramount.

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
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1 vote Thank Flag Link Wed Oct 3, 2007
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.

Eric Wong
1 vote Thank Flag Link Wed Oct 3, 2007

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
0 votes Thank Flag Link Sun Mar 9, 2008
Hi Natalie,
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.
0 votes Thank Flag Link Wed Oct 3, 2007
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