As title says, I converted my primary to a rental in 2023. Took out at Home Equity Loan to help with the down payment on my new home. I’ve struck gold with some amazing tenants thus far, but the current lease expires in May 2026.
2026 will be the third year of the property being a rental. That means according to the “2 out of last 5” rule, 2026 would be the last year I could sell and avoid any capital gains.
The home has appreciated ~$170k since I purchased.
Do I sell in 2026 and lock in that tax free profit, or do i just hold indefinitely until I want to 1031 into a different rental?
Feels like I either sell now or am signing up to be a lifelong landlord if I want to avoid capital gains taxes. Am I thinking about that correctly?
Additional info:
– I don’t need the cash at the moment. But if I lose my job in 2026/2027, it could be a different story.
– I put in a new hvac, water heater, roof, and master bathroom remodel within 1 year before converting to a rental. So theoretically, there shouldn’t be any major repairs looming… knock on wood.
– it cash flows about $500/mo. Not a ton, but it’s in a prime location and I expect appreciation to continue strong for years to come. Plus I’m aggressively paying off the HE loan.
– I hate to admit, but I have a strong emotional connection to the home. It was my first house, I put a ton of work into it, and love the location. Even if I sold and was looking for another rental, I’d want to purchase this exact property again.
Thanks for any advice.
Converted primary to rental in 2023. Sell in 2026 or 1031 later?
byu/apd001 inrealestateinvesting
Posted by apd001
7 Comments
That emotional connection is gonna cost you man – sounds like you already know you wanna keep it but are looking for someone to talk you out of the tax-free exit
If you’re cash flowing $500/mo in a prime location with recent major updates and killer tenants, I’d probably ride it out and 1031 when you’re actually ready to move on. The 2 out of 5 rule savings are nice but not worth forcing a decision you’ll regret
Maybe don’t sell, sounds close to your soul. If the tenants move out or job fails you could move back correct? New place rentable?
The primary residence exclusion is waaaay better than a 1031. If you can, you pretty much always want to take that.
The 1031 only defers your tax liability, meaning you may have to keep playing this game. Theres no guarantee that the next property you invest into would be as successful. It could certainly be a loss and eat into your return. If you sell now, you lock in those tax savings and can redeploy into a good investment on your own time and choosing, not the 1031 clock.
That’s a $25-35k one-time get out of jail free card. I’m taking it every time! You could always just buy another property with a reset tax basis.
Sell, take the $250,000 write off and pay off your current mortgage or invest in stocks and bonds and don’t touch any of it and let it grow.
1031 it now and flip back into something with a lower interest rate in 2027