To: Live2Sail who wrote (42542 ) 10/3/2005 11:58:54 PM From: Doughboy Read Replies (1) | Respond to I held onto my house and after buying a new one, exactly as your friend is doing. I intended to sell in three years in order to take advantage of the 500k exemption, but by the time I got to year three I had really good long term tenants and the gain exceeded 500k so I decided to hold on. (I never did really research how to do the exemption either, so don't take my word for it whether it works or not on a rental property.) While the tax benefits are excellent (the mortgage interest and depreciation may cancel out the rents and may make the cash flow essentially tax free), but it's an iffy 'investment' at best. For me, the problems kicked in right around the fourth year as a rental-- the good long term tenants didn't renew their lease and the rental market in Washington DC had remained flat or went even a bit down so I had difficulty renting it out at the same rent. In the meantime, I had refi'ed and taken more money out, so my interest expenses were up and the taxes kept rising as well. I ended up having negative cash flow for about eighteen months. When I went back and calculated the CAP rate it was 2 or 3%. I did nearly triple the capital gain in holding onto the property for an extra 5 years, but that was in a white-hot RE market. And of course I couldn't get access to the gains without paying Uncle Same, so I finally did a 1031 exchange to trade into a commercial property. Returns are much fatter in commercial overall (7 or 8% CAPs). At the end of the day, I was glad that I held onto the house, but in hindsight, I was taking on a lot more risk (and made many more mistakes) than I thought.
