Oftentimes, we are approached by prospective landlords and they share that they are skeptical about selling their Southern California property for a multitude of reasons:
The concern about not being able to afford a home here upon their return.
The concern that the relocation (job or environment) may not be a good fit.
Or… the concern that their new lifestyle may not work out.
These are just a few and yet I’m sure you get the point. At Good Steward Property Management, we are big advocates, and often advise our clients to take the rental market for a test drive. What do we mean by that? Well… it’s relatively simple. Most people will make up their minds if they are coming back to California within the first few years of leaving. By taking the rental market for a test drive, you can place your principal residence on the market as a rental, and place a resident into your property for 24-30 months, give or take, and see how everything works out. If you decide to come back to California you have a place to land and call home. If you decide you are never coming back… you still have some great options! A few questions we would then pose to our landlords in this situation are:
Have you liked being a landlord on this property?
Do you want to keep this property as a rental property?
Does it make more sense to sell this rental property?
If you decide you want to sell this rental… are you selling with the understanding that you want to purchase another/other rental property/s closer to you?
Or… do you just want to cash out and never look back?
Once you answer these foundational questions… we would be in position to better help you make an educated and informed decision. Now, the biggest question on this list that you really need to consider is, do you want to cash out and never look back? Why is that the most important question to address? Earlier we mentioned that this would be a test drive and we mentioned that you can place a resident in your property for up to 30 months. The reason you want to specifically cap that residency out at 30 months is because you have 3 years from the time you vacate and convert your primary residence into a rental to decide whether or not you are going to keep it or sell it. If you sell it within the first 3 years, you still have, and can take advantage of your principal ownership exemption. If you sell it after 3 years and 1 day… without moving back into that property for another 2 years, then you lose that personal residence exemption (check with your CPA/Tax Advisor to confirm). To help understand where we get our understanding of this is based on past experience and the California Franchise Tax Board website: “You may take an exclusion if you owned and used the home for at least 2 out of 5 years”. So… this is your test drive period!
From the CA Franchise Tax Board
Keep in mind that if you decide to sell the property within the 3 years, without returning to the residence, you will more than likely have some tax liability in the form or previous written off depreciation, and recapture that you would need to address, and you would pay those taxes, on the tax returns the year that you close escrow on that property.
BOTTOM LINE
By selling it as a “Principle Residence” you may have some expenses, and yet these expenses would be significantly less than selling it without your exemption. Let us know if you have any specific questions as we love being your trusted advisors and we would love to help you get from where you are to where you want to be! Selling it after 3 years? Check out our article about 1031 exchanges. Still not sure? Let’s connect for a no-obligation strategy session.
