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I have a house I bought with cash just over 6 years ago, living in it for 2.5 years then renting it out for about 4 years. Right now sitting vacant though I have a tenant ready to move in. Freshly painted, etc. I make about 10K after expenses just on cash flow. Trouble is, the house is 75 years old and has galvanized plumbing, old wiring, etc. The water flow in the bathroom became an issue recently. I got the bathroom sink working just by taking it apart and putting it back together but the shower get's no hot water since about two weeks ago. Two plumbers showed up and took the shower apart and told me that I have to replace the pipes. Minimum cost for just hot water line is 1K. To do the whole house is 5K. House also needs a new roof, exterior trim paint, etc. Interior paint and flooring is fine and new.
The house has more than doubled in value. I would only pay capital gains tax on one year since only one year is outside the 2/5 year rule. I also made just under what I paid for the house off of rents. I could pay to fix it up but it's an old house in a not so great area, an hour from where I live and more and more things will become an issue on this old house as time goes on. It was my first house and has sentimental value, since I paid cash for it when I was in my mid twenties, but holding onto it has major capex payments coming.
If I rent it for a year, I can cover the roof, plumbing, etc. with this years rent alone. But that's assuming they don't trash it like the last tenants did, where I had to replace doors, paint, etc.
Question is, do I sell or keep? It's on a busy street and I would not buy it again...I keep it largely as a fall back position since it's paid off. If I had to, I could move back into it in hard times and minimize living expenses. But I could also use the money to buy a paid off house in another part of the country if I ever needed to do that and just flat out retire. I could also use the money to pay off a more desirable property I currently rent out but plan on moving back into. I'm thinking I either A) sell via 1031 and roll the money as a DP into another house tax free B) sell outright and pay the 1 year of capital gains tax and depreciation recapture (as I understand it) and reinvest the money in a REIT fund or C) Eat the plumbing cost for now to rent it out again and fix the roof this summer.
First, are Buyers happy to absorb something like the cost of replumbing the home after purchase? Won't they expect some concession from you for that?
Second, I'm not a tax expert, but to my knowledge - once you've past the 2/5 rule, you don't only pay for the years beyond the 5th. You don't even pay them on the 3rd - Sale year. You have a cost basis (purchase 6 years ago), you add in the deductible costs of ownership, you sell it for X, you add the recaptures, and the delta is what you pay capital gains on.
First, are Buyers happy to absorb something like the cost of replumbing the home after purchase? Won't they expect some concession from you for that?
Second, I'm not a tax expert, but to my knowledge - once you've past the 2/5 rule, you don't only pay for the years beyond the 5th. You don't even pay them on the 3rd - Sale year. You have a cost basis (purchase 6 years ago), you add in the deductible costs of ownership, you sell it for X, you add the recaptures, and the delta is what you pay capital gains on.
But again, I'm not a tax expert.
I would sell as is. Don't want to take the risk of ongoing maintenance and having tenants trash the place which would cost more to fix. Right now it is painted and clean, ready to move in minus hot shower, which may actually be something else, and I actually think it is but tired of troubleshooting it. Had the same issue with sink but it's working now, but no luck with shower.
Galvanized pipes don't last 75 years, they last about 30 or so years. You are lucky they lasted that long. $5K sounds like a reasonable price depending on size of house. Copper repipe, and replace ALL the fixtures.
Wiring can sometimes last an incredibly long time provided you don't touch it. Even replacing a wall switch or outlet can crack the old rubber insulation wrapped with cloth, and it takes a deft hand to do just that without the damaged wiring cascading back into the wall and before you know it too far back to repair.
Breaker panels are a problem too. Too few amps for modern electrical usage.
One thing in your favor depending on era, new plastic insulated wiring can be pulled through conduits if your house is wired that way. If it's (I don't know the term) standposts and individual wires strung inside the walls then it will require a total wiring replacement.
Sounds right. And I decided to change my opinion on the above and say that I don't know if that would require replacement or not.
I'm a retired electronic engineer, and while I think nothing of doing electrical work on my own house, I know absolutely nothing about building code. When I work on my own house I just copy the existing wiring style.
You may also wish to consider the insurability of the property without those upgrades to electrical and plumbing systems. If a prospective purchaser can't get insurance, they may not wish to buy it.
Rule#1, you have to fix it to sell it & you have to fix it to rent it - buyers of low-priced properties don't have the funds or the fortitude to do major repairs. You know about the problems, so you'ld have to disclose those issues to buyers, and re-renting a house when you know you'll have to do major repairs soon is just a bad idea.. Your future tenants are going to want living expenses for living in a construction site. So, the money for repairs is already spent, kiss it goodbye.
Rule#1a - look hard at those repair costs - pex or cpvc are both inexpensive & used almost exclusively in new homes, no need to buy copper plumbing when the industry standard isn't copper anymore. Tearing up the walls to run new plumbing and wiring shouldn't be that expensive - drywall guys are cheaper than plumbers or electricians, & you shouldn't be paying "extra" for them to break stuff.. Your wall repair quote should be from a guy who fixes walls, not from a plumber or an electrician.. They're just going to sub-out that work & double or triple the cost for the hassle of dealing with it.
Rule#2, if you wouldn't buy it again today, why keep it for tomorrow?
1. to be sure in your state you have to disclose the non-functioning shower/hot water?
2. I checked with an accountant - once you pass the "didn't live there 3 of 5", you're paying cap gains on the whole shebang. Not the years after 3, not the years after you lived there ( 4 in your case), the whole time you've owned it - 6 years.
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