Should I sell this house?

[pibegotan]

Hello All - I'd be extremely thankful if you could give me your feedback on this puzzle. The question is:

Would you sell the house even in this terrible market, in order to avoid capital gain tax?
Or would you keep the house until 2010 when the loan fixed rate turns into variable rate?

Here's the context:

I owe a home in Sunnyvale, California (Silicon Valley), where I lived and then rented out. End of this year is the deadline to qualify for the capital gain tax exemption (for $250,000 maximum gain); that is, if I sell the house by the end of 2007 I will satisfy the requirement of having lived 2 years out of the last 5 years in the home. The equity on the house is somewhere between $150,000 and $200,000.

On the other hand, I have a nice interest-only loan with fixed interest rate of 5.375% until November 2010. It's cashflow negative, the rent is $1900 against $2200 mortgage payment (but the interest deduction makes it almost break-even).

Would you sell it or keep it?

Thanks for any suggestions!!!

[slh2002_77]

I'm not sure if I understand the question correct. But you should not have to pay the capital gains tax on your property since you have lived in the home 2 out of 5 years. You must be single because 250,000 is for single and 500,000 if your married. Also let's say your capital gains were 260,000 your only going to pay taxes on 10,000. You pay on anything over the 250,000. You could always get married then you'll have 500,000 dollars to play with. I would find out what the home is worth. If your not losing anything on it hold on to it and let it continue to go up in value.

[Jaysonnhs]

It sounds like you're in a good position right now and that you should keep the home if you can afford it. I'd look into using the equity for other investments. Build your real estate portfolio now when it’s the best time to buy! You won't get as much from the home if you sell it in this market. Let's say you sell it for $10,000 less than it appraises for - that's a couple years of your negative cash flow and you never know when the market is going to turn around. You could recoup your annual negative cash flow if your home increases 1%/year. If you can afford it - I'd say keep it, but it's just an opinion.

[rob22911]

Definitely keep it and let it gain value, if you can afford it.