My wife and I are both around 50 and getting close to financial independence. We’ve followed a pretty Boglehead-style approach, low-cost index funds, maxing out retirement accounts, staying simple.
We also own a rental property in California that I’m starting to question more and more. Here are the main details:
- Bought 4 years ago for $625K, current value around $860K
- Mortgage balance $415K at 3.5%, 26 years left
- Cash flow: roughly –$9K/year (includes all expenses and mortgage)
- Appreciation: averaging 3.9%/yr
- Depreciation taken: about $100K
If we sold today:
- After 6% selling costs and an estimated tax bill (maybe $70–80K, but still need to confirm), we’d probably walk away with somewhere in the $320–340K range.
- That money could go straight into our 70/30 index portfolio (around 5.5% expected return).
- We’d also stop the $9K annual cash-flow loss.
All in, we’d improve our cash flow by roughly $25K–$27K per year (no more negative rent + investment income). That could move our FI date up by a couple of years.
I built a spreadsheet comparing “keep vs. sell” over 10 years – factoring in appreciation, taxes, and basic maintenance. It’s basically a wash: selling ends up only about $22K ahead after 10 years. But selling would simplify our finances, eliminate earthquake/tenant risk, and give us flexibility now.
My wife’s main concern is the tax bill, she hates the idea of handing over that much to the IRS. She also wonders if keeping it could help our kids later if they ever need housing. I see it more as paying a one-time cost to gain freedom and liquidity sooner.
So I’d love to hear how others would look at it:
Would you sell in this situation to free up cash flow and reach FI sooner, or keep it as a long-term inflation hedge and potential family asset? And if we do decide to sell, any advice for reducing the tax bite (timing, 1031 exchange, etc.)?
TL;DR:
Rental worth $860K with 3.5% mortgage and negative cash flow. Selling could net $320-340K after estimated taxes and improve cash flow by $25K+/year – but we’d owe a one-time tax bill that still needs to be confirmed. Sell for FI flexibility or keep for long-term appreciation?
Thinking about selling our rental to reach FI sooner — worth it?
byu/yond238 infinancialindependence
Posted by yond238
5 Comments
Yes. Less headaches and better performance in the market. I would sell tomorrow.
Also to add on to this. If you were to retire in a few years, you would need to draw additional funds to cover the mortgage of the rental. In retirement, controlling your MAGI could help you qualify for ACA subsidies, etc and eliminating the mortgage, as well as the $9k loss, will only help you lower your future MAGI.
Regarding your kids, who knows where they end up. Are you willing to hold and manage the rental property for 10+ years (no idea how long this would be considering you did not give ages for your kids) in the off chance that they want to settle down close to you?
Don’t let the tax tail wag the dog. Just bite the bullet, sell the rental, and dollar cost into the market. You’ll relieve yourself of any future phone calls from your tenants asking for something to be fixed, etc. There are no phone calls from your tenants that are a good thing.
If you want to minimize taxes, the only thing I can think of is to move into the property yourself and live there for however long to claim it as your primary residence. Then you can sell, and shelter capital gains, but this seems like a hassle and something that you, nor your wife, would really want to do.
Your math overstates the benefit of selling the rental because it mixes investment growth with actual cash flow. The $9K annual loss you’d eliminate is real cash flow improvement, but the 5.5% return on $330K (about $18K) is an *expected portfolio gain*, not spendable income unless you plan to draw it down. Those two numbers shouldn’t be added together as if they were both cash flow.
You’re also comparing an unleveraged 5.5% portfolio return to a leveraged real-estate return. With a 3.9% appreciation rate on an $860K property and a $415K mortgage, your equity is earning roughly 7–8% before taxes. Plus, your tax estimate likely understates depreciation recapture and capital gains. When you factor in leverage and taxes, the financial improvement from selling is much smaller—and might not accelerate your FI date by more than a few months.
Sell. Tons of risk concentrated in that extra property, not getting enough return for that risk.
Paying taxes means making money. Yeh it sucks but at least your making money
That’s what I tell my wife lol
“We’d also stop the $9K annual cash-flow loss.”
This is why you sell.