We rent our $750,000 home with a 2.5% mortgage rate for $4,000 a month, but the tenant is leaving. Should we sell now or later? (2024)

Aarthi Swaminathan

February 16, 2024 at 6:44 AM·3 min read

We rent our $750,000 home with a 2.5% mortgage rate for $4,000 a month, but the tenant is leaving. Should we sell now or later? (1)

Dear Big Move,

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My wife and I moved out of our former primary residence a year ago, and we have been renting it out for $4,000 a month. Our current tenant is moving out next month and we will need to find a new one.

The house is probably worth about $750,000 and we have a $450,000 mortgage on it, which we managed to refinance when mortgages were rock bottom at 2.5%.

Should we plan to sell the house in two years in order to get the capital gains tax exemption, and then use the proceeds to buy a new investment property?

Or would we be better off keeping the property, continue renting it and abandon the tax exemption in order to hold on to our low mortgage?

Dear Looking,

You have a 30-year mortgage at a rock-bottom rate of 2.5% that you will possibly never see again in your lifetime. Why are you in a rush to sell?

If you are trying to get ahead without paying taxes, you have time, but how much time is the question.

The biggest challenge with waiting to sell is that your home could appreciate significantly, and you may not qualify for the capital gains tax exemption of $500,000 when filing jointly with your spouse.

You don’t say how much you bought it for, but even if you had bought it for $500,000 and the home is $750,000, you’ve still got time before hitting that cap of $500,000. As long as you don’t exceed that, and the government does not change that number, your plan to wait and sell makes sense.

As you’re looking to buy a new investment property, consider doing a 1031 exchange. With a 1031 exchange, you can sell whenever you want, and defer paying taxes on the profit. The “catch” is you need to move that money into another investment property. Plus, you may have to take on a new mortgage.

Factor in the new rate and the potential rental income, and see if the math makes sense. If that other investment property you’re looking at doesn’t net you the same or similar profit as your current rental, then don’t sell.

The bottom line: Unless there’s a strong reason for you to sell independent of taxes — perhaps you need the extra money, or you are sick of dealing with tenants, for instance — it seems like the best move would be to hold on to the home, or try to swap it out for another.

And don’t just take it from me. “There is no hurry to sell,” Ed Fernandez, president and CEO of 1031 Crowdfunding , a company specializing in 1031 exchanges , also advises.

“You can always capture the gains any time after two years, but in this scenario, it looks like the cash flow you are receiving from the current mortgage might be better than any opportunity you would have to go out and buy in the current market environment,” he added.

That’s two opinions in favor of retaining your rental. The third opinion? That’s up to you.

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