08 May Should I sell my investment home or keep it?

Q. I have a second home that’s appreciated a lot over the past 10 years. I do get good rental income from a long-term renter, which I’m fortunate that I don’t need most of — the taxes on the home are low and I have no mortgage. The renter takes good care of the property. How can I decide if I should keep the house to pass it to my kids, or to save the rental income for them, or to sell and invest the proceeds of the house? It’s worth about $450,000.
— Landlord

A. It’s terrific that you have a reliable renter.

And what to do with a home like this for the long-term will depend on what you want, and what you think it would mean for your kids someday.

“I love passive income from real estate, especially if you have a good long-term tenant,” said Matt Rembish, a certified financial planner with OneDigital in Boonton.

He said if you sell the property, you could potentially be looking at a large tax bill.

“You’ll have to pay a long-term capital gains tax on the gain portion of the property, which will be up to 20%,” Rembish said. “If you’ve been depreciating the property on your tax return, there may be `depreciation recapture’ at the time of sale, which will also increase your tax liability.”

If you pass away still owning the property, and pass it to your kids, they will receive a “step up” in basis which will effectively eliminate the gain on the property, Rembish said.

For example, if you bought the property for $200,000, and it’s worth 450,000, your gain is 250,000, and you’d have to pay tax on that amount if you sold it, he said.

But if the property is still worth 450,000 when you pass away, and your kids inherit it, their new “cost basis” on the property is 450,000. If they sold the property for 450,000, they would owe no capital gains tax since there wasn’t a gain, Rembish said, calling it an “incredible benefit.”

If you sold the property and invested the proceeds, your kids would receive a step-up on those assets as well once they inherit it, he said.

Before deciding, it’s best to get all the facts.

“The best place to start is to talk to your tax preparer to understand the potential tax liability you are looking at if you sold,” he said.

Also ask yourself: Do you want to be a landlord for the rest of your life? It seems like you have a good situation with your current tenant, but what happens when this tenant leaves? How much of your time are you willing to put towards this property?

At some point in the future, you may not think it’s worth it, Rembish said.

From a tax liability standpoint, it may make sense to hold the property until death to take advantage of the step-up in basis, he said.

“If you don’t need much of the rental income, you can invest, and that gives you some flexibility in your decision. This can be used to pay the taxes if you decide to sell, inheritance for your kids which would have a step up in basis, or you can use it for your own financial goals,” he said.

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This story was originally published in May 2025.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.