Recovering an expense that must be depreciated.

[thejeepdriver]

My wife and I own an investment property, a duplex, purchased in 1999 and paid off in 2008.

The gross rental income is $1,200 per month.

The house is currently in need of some foundation repair along a 12 foot section of basement wall, and will soon need a roof, as it was last replaced in 2000. I estimate these two repairs will cost $30,000.

The roof replacement will have to be depreciated over a period of 27.5 years. I think the foundation repair will be considered as a repair and be eligible for a same year deduction.

I am 51 and plan on retiring at 60. My plan was to keep the duplex and sell it once I retired. However, the above needed repairs are going to consume 25 years of rental income, just using gross numbers ($30,000 / $1,200 per month = 25 years.) And I'll still have the usual maintenance expenditures.

Using online resources, e.g. Realtor.com, Pennywise.com, etc, I estimate the house is valued at $128,000. I have not spoken to a Realtor.

I am wondering if it is in my best financial interest to sell the property now. Maybe I'm not looking at the situation correctly, but it seems to me I'll never recoup the cost of these repairs. I would like some educated opinions on what I should do.

[NCperson · Accepted solution]

@thejeepdriver - check your math: $30,000 / $1200 is 25 MONTHS not 25 YEARS. 

Further, whether to repair or not really should not affect your decision of when to sell:  if the market is efficient, the market should discount the price it would offer for your property by the same $30,000 if you fail to improve it.  So the net cash to you would be the same either way.   

[thejeepdriver]

@NCperson, I knew something had to be off, that the error was blatantly obvious is embarrassing.  Thank you for setting me straight.

[gxt1]

There is a lot to consider beyond what you've stated and as already said, it's 25 months, not years, but not really.

The rental income doesn't just go to the cost of the repairs, there are property taxes, income tax, insurance, mortgage (if any),  any applicable utilities, and any other routine maintenance costs to consider before knowing how much profit there is to apply to the estimated 30,000 cost recovery. And even that's not quite complete because the taxes will be a little lower each year due to less profit and the deductible expenses.

Then there is the appreciation of the property, is the value steadily climbing and if so, what kind of yield might be expected by holding on to the property? Even if you're out of a rental profit for a while (with the associated risk of some other unforeseen repair) you still might make out on appreciation, if there is significant appreciation.

What is the tax basis of the property for computing capital gains? If your cost basis in the property was say, $50,000 and you netted $125,000 for the sale, assuming you are in the 15% capital gains tax bracket then there would be 15% to pay on a profit of $75,000 = $11,250

Capital gains is taxed at 15% (if that is your rate) but the profit also is counted for AGI type calculations, for things like how much money you made to determine medicare premiums (IRMMA income thresholds). At least at your age you don't have to worry about that but the AGI change is something to be aware of.

The current Trump tax cuts for the middle class expire at the end of 2025. Will the capital gains still be 15% in 2026 or will it be maybe higher, along with taxes in general? There is no way to be sure. But again something to think about. Especially after the election, if you don't sell before it.

These are the thoughts that go through my mind (the question strikes close to home), obviously how they might apply to you could differ.

[thejeepdriver]

There is a lot to unpack in your response.  Thank you for your thoughts.