To Sell or Not to Sell: That is the Question

A financial advisor recently answered this question in the Sacramento Bee:

Q: We own three homes outright, each with a value of around $400,000. We moved into one of the rentals a year ago. We are fixing it up, and we will sell two years from the date we moved in to avoid the capital gains tax. Once it is sold, we will move into a second home, live in it for two years and sell it. At this time we are property rich, cash poor. My husband has a small IRA, and I make about $16,000 a year working part time, and he is retiring this March with about $1,300 a month Social Security.

Our question is, with the housing market changing, should we rethink selling the home we love and have owned for years instead of waiting one more year to sell our rental home? We are worried that if we wait another year we may be unable to sell one of our local homes.

A: It's impossible to know what the housing market will be like one year from today. Will the market pick back up after a slower winter? Or will inventories continue to rise, causing home prices to stagnate or fall?

The best thing you can do is at this point is to crunch some numbers to see what's at stake. Living in a house as your primary residence for two years can avoid capital gains taxes, but it may or may not be worth it. With federal capital gains taxes at only 15 percent, it wouldn't take much of a decline in home prices to wipe out any benefit of living in your home for another year.

I suggest you sit down with an accountant to determine what your tax bite (including recapture of depreciation, state taxes and the possibility of AMT) would be if you sold your home now vs. one year from now. Once you know the actual cost, you can then make an informed decision on whether waiting a year from now is a risk you want to take.

It's been said a bird in the hand is worth two in the bush. One thing you know is this: You could sell your homes today and have plenty of cash to enjoy a comfortable retirement. A year from now it may be a different story.

Real estate agent Jimmy Castro has this advice about selling in the Sacramento housing market:

The housing market in the Sacramento Region has cooled off considerably! Especially when compared to the last few years...But now, with the current over-supply of investor owned property in the Sacramento area for sale, homes are taking much longer to sell and sellers are forced to lower prices or pull their houses off the market.

There are definite signs of price erosion in the Sacramento Region, and that will affect pricing across the area, especially in the $600,000 and above market. If you are in Sacramento and have a neutral or positive cash flow, I would recommend you HOLD on to your property because I see the long term prospects for the Greater Sacramento area to be good. If you are looking to enter the Sacramento market to invest, I would suggest you look to either Folsom or El Dorado Hills...

Speaking of which, you'll need to settle on an asking price. In doing so, forget what you originally paid for the house, how much you've spent on renovations or remodeling, and even how much money you need to move on to your next home. When it comes to pricing your property, the only thing that matters is what comparable homes are selling for in your neighborhood now -- which may be less than you sank into it.