Revisiting Sale of Investment Property to Renters

You suggested in your answer that an installment sale might be used because it would allow the property remaining in the present owner's name. However, you did not mention that the lender would then have the right under the standard "due on sale" provision in virtually every mortgage to call the loan due.
 

Just a thought from your friendly neighborhood Ohio real estate attorney.

A: Thanks for pointing out that mortgage lenders, in this situation, may have the right to call the loan (that is, demand you repay it immediately), although not every lender will do so.

Still, it's a risk every investment property owner should be aware of. It’s a good idea to check with your lender to see whether the due-on-sale clause will be triggered before closing on an installment sale.

Thanks for reading the column and taking the time to write.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.

d as you think.

First, you don't want to sell your new investment condo until you've had it at least at year. After you have owned it a year, it will be considered a long-term investment, as opposed to a short-term investment. If you sell after a year, you'll pay a maximum tax of 15 percent on the profits, as opposed to paying at your current marginal tax rate. That could be quite a savings.

A 1031 tax-free exchange, where you sell one investment property in order to purchase another, won't work for you because you already own your current residence. You can't "buy" something you already own.

If you keep both of these condominiums in Florida, and they both become rentals and you move literally across the country to Seattle, you will have to figure out how you're going to maintain them and keep them rented. I assume you've already thought this out and have planned for it.

Now, let's turn to Seattle. You could rent for a little while on a month-to-month lease, but I get the distinct feeling you'd really rather own. And why not? You've already made two smart investments.

To be sure you're not over-extending yourself, spend some time with a local mortgage lender to run through the numbers. Unless you bought your neighbor's condo with cash, or unless you earn a pretty decent living, a lender may believe you're over-extended financially with the two properties you already own. If that's the case, you'll have to wait to buy something until you've sold one of the Florida condos.

If your debt-to-income ratios are in order, you can easily solve your temporary cash-flow problem by taking out a home equity loan against your primary residence and using it as a down payment for the property you're going to purchase in Seattle.

Home equity loans are easy, fast and relatively inexpensive, since many lenders will do them without closing costs. After a year has passed, you can sell your downstairs Florida condo, pay off your primary mortgage and home equity loan on your other Florida condo and dramatically decrease the amount of tax you'll pay on the sale.

Another possibility is to use a zero down payment loan for the Seattle purchase. While you may pay a little more, plus you'll pay private mortgage insurance, you won't have to put up any cash.

If you find you're easily able to maintain the two rental units from afar, and you and your finance are able to swing the mortgage in Seattle plus the mortgage and home equity loan in Florida, you may choose to keep everything.

Considering the way homes have appreciated in Florida over the past few years, that may be your smartest move. Of course, the stock market mantra, "Past performance is no guarantee of future returns," holds true for real estate as well.

For more details, consult your tax preparer or a real estate attorney.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.