If you own rental properties, this post may resonate with you. It’s about what to do with a property once a tenant gives notice: keep renting it out, sell and pay capital gains taxes, sell via a 1031 exchange to defer taxes, move back in to avoid taxes, or—most controversially—simply leave it empty.
For most of my career writing about real estate, I’ve focused on buying properties and building wealth. But as we get older, the question of when to simplify becomes just as important. John, a longtime reader, is facing this very crossroads. His situation offers a useful case study for anyone deciding whether to hold, rent, cash out, or landbank.
John’s Rental Property And Wealth Situation
John owns a San Francisco rental property that will be vacant on November 1, 2025, after his tenants gave notice. He bought the home years ago for $1.85 million and invested roughly $180,000 in upgrades. Today, he estimates it could sell for $2.7 million.
The good news is that the property is free and clear—no mortgage. However, carrying costs still add up. Property taxes alone are about 1.24% of a $2.3 million assessed value (~$25,000/year), and with insurance, utilities, and basic maintenance, total holding costs are around $30,000 a year.
The home currently rents for $8,200 a month, with market rent closer to $8,500, generating $102,000 a year in potential income. But John is tired of tenants and the stress that comes with managing rentals. John is strongly considering selling or leaving it empty. He believes his home will appreciate handsomely over the next decade due to the tech boom.
Further, John invested in several private AI companies during the pandemic that have since grown to roughly eight times their original combined value. More importantly, his seven-figure public stock portfolio is also up ~100% since January 1, 2020. So maximizing rental income is no longer a financial necessity for him.
The Four Main Options For The Rental Property
Although John can afford to leave his San Francisco rental property empty, he must first consider these four more optimal financial choices.
1) Rent It Out Again
John could re-tenant the property for $8,200 – $8,500 a month and continue collecting strong cash flow. The risk is that if he later decides to move back in or sell, tenants might still be in place—creating timing conflicts and potential headaches.
In 2028, John plans to relocate his family back to Charlottesville, Virginia, to be closer to his mother. Ideally, he’d like to sell all his rental properties before the move. But if the new tenants haven’t left by then, he’ll either have to become a long-distance landlord or hire a property manager.
2) Sell And Pay Capital Gains Taxes
John sold another property in July 2025, so he has already used his $500,000 tax-free primary residence exclusion until July 2027.
If he sells now, he faces about $500,000 in capital gains. At a combined 33.2% federal and California tax rate, plus ~5% in commissions and transfer costs (~$130,000), he estimates he’d owe around $300,000 in taxes and fees. A painful number, but one that would free up roughly $2.4–$2.5 million in net cash for other uses.
With Treasury bonds yielding over 4%, John longs for a simple, risk-free way to earn money. At the same time, he owns an ideal single-family home that can comfortably house a family of four or five in the heart of a new tech boom. Potentially missing out on another 30 – 40% in appreciation over the next decade may cause a lot of regret.
3) Sell Via a 1031 Exchange
A 1031 exchange would allow John to defer the taxes if he reinvests the proceeds into another rental property. But this strategy means buying a replacement property and continuing to deal with tenants—exactly what he’s trying to avoid.
4) Move Back In
By moving back into the property for at least two years, John could eventually sell it tax-free under the primary residence exclusion. Even though there’s no mortgage interest to deduct, the SALT cap deduction limit to $40,000 from $10,000 under the One Big Beautiful Bill Act should help reduce John’s taxes.
But moving back in would mean giving up the rental home his family currently enjoys. That said, the timing would work if he really plans to relocate back to Virginia in 2028. He has time to give his 45-day notice to his landlord and arrange for the movers.
The Temptation To Leave The Rental Empty
Now that we’ve covered the most sensible financial options for John’s rental property, let’s consider a fifth choice: leaving the property vacant.
With a healthy net worth and a comfortable income, John is tempted to keep the house as a “quiet asset,” free of tenants. This way, he has minimal headache and maximum flexibility on when to sell when he moves to Virginia.
The annual carrying cost of about $30,000 is manageable, but the opportunity cost of forgoing $102,000 in annual rent is significant.
With the AI tech boom, John is long-term bullish on San Francisco real estate. In 20 years, he believes the property will surely be more valuable than it is today. If mortgage rates continue to trend lower, he believes the pace of annual appreciation will surpass the property's carrying costs.
How Wealthy Do You Need To Be To Comfortably Leave a Rental Empty?
John’s numbers provide a rare window into what it takes financially to luxuriously hold a high-value property with no cash flow. Here’s how to think about it, both for John and for any landlord weighing a similar decision.
1. Annual Carrying Costs vs. Net Worth
John’s holding cost of $30,000 a year is about 1.1% of the property’s $2.7 million value. Whether that’s “affordable” depends on what share of his total net worth it represents.
- At a $2 million net worth, $30,000 equals 1.5% of wealth—a noticeable bite.
- At a $5 million net worth, it’s 0.6%—easier to stomach.
- At a $10 million net worth, it’s just 0.3%—much easier to stomach.
- At a $20 million net worth, it’s just 0.15%—a rounding error that isn't noticeable.
For most landlords, if the carrying cost is under 0.5% of total net worth, leaving a property vacant starts to feel like a lifestyle choice rather than a financial mistake. John can afford to wait months, if not years for the perfect tenant to come along and not cause him trouble.
John should also consider the lost income from not renting, along with the carrying costs. A similar calculation could be made to quantify the impact. However, since John has already decided he’d rather forgo the rent to avoid the hassle, that calculation is ultimately moot.
2. Carrying Costs vs. Passive Income
Another worthy metric is whether your passive income—dividends, bond interest, other rentals—can easily cover the cost.
- With $300,000 a year in passive income, $30,000 is only 10% of that income.
- With $60,000 a year, it’s 50%, which feels far riskier.
A helpful rule of thumb: if carrying costs are under 10% of passive income, you have the “luxury gap” to leave a property idle indefinitely.
3. Opportunity Cost: The Rent You’re Giving Up
Finally, weigh the lost rent. John’s property could fetch about $102,000 a year in rent.
- For a $2 million net worth, that’s a 5.1% yield—hard to ignore.
- For a $5 million net worth, it’s 2%—still meaningful.
- For a $10 million net worth, it’s about 1%—easier to justify if peace of mind matters more than incremental return.
- For a $20 million net worth, it’s about 0.5%—almost insignificant for the benefit of peace of mind.
Example Comfort Levels
| Net Worth | Annual Carrying Cost ($30K) as % of Net Worth | Lost Rent ($100K) as % of Net Worth | Comfort Level |
|---|---|---|---|
| $2M | 1.5% | 5% | Tough unless income is very strong |
| $5M | 0.6% | 2% | Manageable if passive income covers it |
| $10M | 0.3% | 1% | Comfortable “luxury choice” |
These ratios give any landlord a framework for deciding when leaving a property empty is a sensible trade-off for freedom and flexibility.
Lessons for Fellow Rental Property Investors
If you’re facing a similar crossroads, here are a few takeaways from John's experience so far:
- Taxes Drive Timing. The IRS’s primary residence exclusion and 1031 exchange rules can save hundreds of thousands of dollars, but they dictate your calendar. Plan your sequence of sales early.
- Lifestyle Over IRR. A spreadsheet might tell you to hold for higher returns, but if a property causes stress or limits your freedom, selling can be the smarter long-term move.
- Simplicity Has Value. Carry costs on a vacant property may not break you, but they weigh on you over time, financially and mentally. The simpler your life is, the less of a desire you'll have for selling a rental property.
- 1031 Exchanges Are Powerful but Binding. They’re great for investors committed to real estate, but they don’t fit well if your goal is to downsize or exit the landlord role.
Final Thoughts
John admits that paying about $300,000 in taxes and fees to sell when he could simply rent or hold feels extreme. He could hold onto the property until death so his kids could benefit from the step-up in cost basis and pay no taxes. At the same time, selling would simplify his life and bring him one step closer to his goal of relocating to Charlottesville to care for his mom.
For other landlords, the takeaway is clear: if your carrying costs and lost rent are a small fraction of your net worth and passive income, you may one day earn the rare privilege of keeping a property empty purely for peace of mind.
But if those numbers still feel significant, the math will likely push you toward either renting for income, selling for liquidity, or exchanging for a more strategic property.
Readers, What Would You Do?
If you were in John's shoes, which path would you choose?
- Rent it out for $8,500 a month and keep the income stream alive?
- Sell now and pay the taxes and commission for a cleaner, simpler life for the next two years?
- Move back in to reset the primary residence exclusion clock, but go through an inconvenience and lifestyle downgrade?
- Execute a 1031 exchange to defer taxes but stay in the landlord game?
- Leave it empty and just pay the carrying costs for simplicity given his high income and net worth.
I’d love to hear your thoughts! Have you ever considered leaving a rental vacant even when you could rent it for strong income? At what wealth or income level would you feel comfortable doing so? John’s case shows that while financial freedom creates options, every option carries its own trade-offs.
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Lots of good ideas shared in the comments!
My recap of the situation: John has a net worth of $10M+. He’s a longtime FS reader. He knows how to handle his money. He has an aging mother who needs care. I’m guessing that puts him in his 50s. He’s willing to move across the country. It sounds like he doesn’t need to work anymore. He doesn’t need the rental income. He definitely doesn’t need the headaches.
My thought process: John’s looking for simplicity, rightfully so. Profits should not be the most important thing to him. He’s earned that privilege through decades of hard work and financial education through sites like FS. He’s presumably made a lot of sacrifices to get to this point in life where he’s created options for himself. This is a glorious position to be in. John’s made it. There’s no reason to overthink it.
My verdict: Sell the property. Invest the profits in index funds. Take care of your mom and enjoy yourself in VA! John’s situation is what a lot of us are striving for with FI. He’s won “the game” and now it’s time to realize it.
I’ve always thought the hardest part of FI is switching from a mindset of accumulation to a mindset of contentment. Here’s John’s chance to prove to himself (and the rest of it) that’s it’s possible and worth it.
Great exercise, thanks Sam!
Matt
Would you consider upgrading to have an AI voice or yours read these articles? Would be easier for me to listen to your content. I do the same with The Atlantic and some other outlets.
Maybe! Just costs money and time. Would you be willing to pay a monthly subscription fee to listen to my posts, like the Atlantic?
Why not consider a 1031 into a DST. Even better if it is with an operator that will roll it into a fund via 721 exchange improving diversification/liquidity.
Also, if you consider the foregone value of $102k/year compounded at a reasonable rate of return you’re looking at a pretty large hole. At 3% rent growth and 6% compound return, you’re short $1.5MM after 10 years.
Good points. A 1031 into a DST could work, especially if the operator plans to roll it into a 721 for better diversification and eventual liquidity. The numbers you highlight on the opportunity cost are eye-opening too—compounding $102K a year at 6% while rents only grow 3% does create a sizable gap over a decade. Definitely something to factor in before holding for sentimental or convenience reasons.
Reference:
A 721 exchange (also called an UPREIT exchange) is a tax-deferred transaction that lets you contribute your real estate into a Real Estate Investment Trust (REIT) partnership in exchange for operating partnership (OP) units instead of selling outright.
Here’s the key idea:
• In a 1031 exchange, you swap one property for another to defer capital gains.
• In a 721 exchange, you swap your property (or your interest in a DST) for shares in a REIT’s operating partnership.
• The REIT can later convert your OP units into publicly traded REIT shares, which are far more liquid than holding a single property.
Why investors like it:
• Tax deferral: Like a 1031, you defer capital gains and depreciation recapture.
• Diversification: Instead of owning one building, you end up owning a slice of a large portfolio.
• Liquidity potential: After a required holding period, OP units can usually be converted into REIT shares and then sold.
Trade-off:
Once you do a 721, you typically can’t do another 1031 exchange later—you’ve essentially moved into the REIT world permanently.
I find it fascinating that no one is bringing up the structural undersupply of Single Family Homes in coastal CA. I’m a capitalist through and through, but the idea of artificially restricting rental supply during a housing crisis seems borderline immoral. Am I the only one here who thinks this?
This was my first thought. People need places to live and this restricts supply. My gut feeling is people should be financially disincentivized (beyond still paying property taxes, etc) to take the option of just leaving it vacant.
But this is not a charity asset for John. It’s an investment that carries risk and active effort.
Related post: https://www.financialsamurai.com/investor-virtue-signaling/
Interesting. I have a property that is ideal for development of 20 to 30 homes. It’s in a prime location surrounded by single family homes as well as multi family homes. The current zoning doesn’t allow for development though due to the area being on septic and not having public sewer. Given the housing shortage and knowing that a large septic system could be installed to support 20 to 30 affordable homes within 1 mile of city center, I would think the city would be motivated to allow its development. But no. Even though I’ve confirmed that a large septic system could easily be designed to connect to city sewer if/when it is brought to the area. As such, I’m forced to try and sell the property as a hobby farm, or just sit on it until sewer is brought to the area. Meanwhile the single family homes that sits on the property is vacant, as I do not want the hassles related to renting the property. I do have it listed for sale, but being a “unique” property requiring a buyer who wants to take care of the average, it sits empty. It’s crazy to me the city won’t bend on the zoning to allow for much needed housing in the area. It defies logic imo.
Immoral? No. It’s not immoral. It’s his property and he can — and should — do with it as he pleases. Live in it. Rent it. Raze it. Expand it. Sell it. Leave it empty. Loan it out to friends. Use it as a second home.
Calling yourself a capitalist through and through doesn’t necessarily make it true. Nobody is artificially restricting rental supply. A property owner is simply doing what he deems best for his own personal situation. And since the property is his, there’s nothing wrong with that.
If you’ve ever been a landlord — especially in California — then you know it’s fraught with government mandates and requirements of all sorts, and places all the power in the landlord/tenant relationship in the hands of the renter. That’s not for everyone.
Calling the idea of not renting a property “immoral” reminds me California State Senator Scott Wiener’s statement that “single-family homes and yards are immoral”. Of course, he has pushed for many years — and finally succedded, I might add — to override local zoning state-wide and make it possible to erect a high rise, high density apartment complex in the middle of a single story ranch house neighborhood like mine.
If anything is immoral, it’s that.
Should we force people to do what we wish with their money and assets? Personally, I believe everybody should feel free to do what they want with their money, if legal. That freedom is a big premise of America.
Strange question, given that we regularly do this for the benefit of society. Taxes and zoning laws for instance are “forcing people to do things with their money and assets” in order to benefit the public good. Lots of municipalities have also addressed this exact issue of empty units with airbnb and second home regulations. It’s really funny that the guy above thinks zoning laws are an example of freedom and how people should be able to do whatever they want.
To me the unique thing about real estate in particular is people need it to live. We’ve made it an investable class and that creates real tension between individuals’ financial goals and basic human need. As an example of another need turned investment, you could think of someone buying up water rights in a desert, which then leads to personal price appreciation, but with people dying of thirst. I’d have no problem calling that immoral.
Thanks for sharing your thoughts, Michael. I think it’s great you’re willing to rent at a discount for the benefit of society. How many units of subsidized housing are you currently providing?
Pls spend some time looking on Craigslist, Zillow, or Redfin. At any given point there is lots of supply of housing at all price points. Let’s say John lists his unit for rent for a price he believes is fair. But he has no takers after two months. Should he required by law to lower his rent ask, even if you is happy to take his time?
You may enjoy this related post: Investor Virtue Signaling In A Capitalist Society Is Fascinating. The goal of this post is to encourage people who tell people they should pay more taxes, discount, volunteer more, give more to actually do what they say as well. To be consistent with thought and action.
The thing is, I didn’t make the argument that he should rent at a discount. I’m making the argument that it’s not ethical to hoard basic human necessities. I think ideally he’d be required to not leave a unit vacant for too long or be taxed to disincentivize it. The free market — capitalism! — would take care of determining its value at that point.
I did read the virtue signaling thing and while I agree the hypocrisy of that one guy is annoying, a lot of times I feel like the words “virtue signaler” are deployed by people who are really just trying to justify doing what they want. The whole piece is about the guy, but what about the underlying argument? There are plenty of non-hypocritical people who hold that view.
Is it hoarding if there are plenty of units for rent at any given time and that John views the asset as an investment for his retirement, where he can sell or rent when needed?
It’s a slippery slope to start making rules on what one has to do with their own property.
Here’s a thought: Is it unethical to hoard food as a basic necessity by being overweight, loading up your pantry, and throwing away food, when there are hundreds of millions of malnourish people in the world?
Many would say yes, but ~60% of Americans are overweight and we waste tonnes of food every day.
Related: The Weight Loss Tip To Die For
Yeah, I don’t the fact that rentals exist means there’s not a housing shortage in San Francisco. Nor is this guy leaving $102,000 on the table every year because he’s tired of hassle really arousing sympathy related to his retirement.
And yeah, it’s unethical to hoard food. But there’s obviously levels to the thing. I think everyone probably does some unethical stuff in their lives — it’s hard not to — but this guy is like someone throwing steaks out a window into the ocean as a “luxury move” while people on the street look up and watch. If he doesn’t want the teachers and firefighters and such getting priced out of SF to make fun of him, he should do something different.
We’re probably just going to have to agree to disagree. I do get where you’re coming from with “slippery slope” to tell people what to do with private property, but we do it all the time in many different ways. I mean, this guy is literally hoping to take advantage of a massive govt. social engineering scheme (cap gains exemption) that incentivizes how the entire U.S. housing market works.
Another option is to sell the property under IRS installment sale rules (seller financing). Monthly payments from the buyer generate income yet escape the “joys of property management.”
Capital gains tax is spread across the years and the proportion of gain recognized in a given calendar year.
Think long term financing generating years of interest income at a rate superior to US Treasuries secured by real estate and capital gain tax trickling in over many years so it can be more easily managed through tax planning.
Real estate notes like this can later be sold if desired.
He’s facing a $300K tax bill regardless at this point, so that buys him some time to consider options. I would hold the property for now and consider hiring a management company sooner rather than later. I’ve not always had great results with property management companies, but as this seems a higher end property, maybe that would attract a better tenant that he wouldn’t need to deal with directly. That could work in his favor as he intends to move out of state. Assuming values increase over the next 20 years as he expects, having the income would offset the fact that he paid cash upfront for the property. I think he needs to pay himself back for “fronting the money” to himself. He could always sell at some point in the future if this plan doesn’t work out.
I would just sell and invest those proceeds into AI stocks.
Hah, sounds good. I’m a fan, but a dramatic shift to 100% AI from a real and stable asset would be extreme. Maybe 25-35% of the proceeds.
Remember what you said the richest people didn’t get rich investing in index stocks.
True. But he’s already got plenty of AI exposure and is worth 8 figures already.
Why not get a property manager? You will have less net income, but more than leaving it empty!
Great article, interesting take on the different choices. We have a situation with a vacation home with very similar numbers to John. We decided to short term rent the place while we’re not there but with a property manager so we don’t have to deal with the hassle. Well worth the price we pay the manager.
First choice: I would move into the vacant house I own free and clear. This gives me more flexibility regarding my eventual move out of state, i.e., I don’t need to worry about when to give notice to my current landlord.
If the hassle of moving is just too much to stomach, or I love, love, LOVE my current rental home way more than my own vacant property:
Second choice: See which one of my offspring wants to start living in the place and take over all the carrying costs.
Third choice: Do a 1031 exchange with a property out of state close to my parent that I would eventually move into. Definitely hire a property manager.
Fourth choice: Just sell and bite the bullet on costs. Stock market gains should eventually make me come out ahead in some number of year.
Question: Isn’t the opportunity cost actually “only” $72,000 rather than the full $102,000? That is, $102,000 projected annual income minus $30,000 (assumed total annual) expenses = $72,000?
The $30,000 is a sunk cost, regardless of renting it out or not.
So the opportunity cost is the whole $102,000 you don’t collect.
But you’re free to use use $72,000 as the net benefit forgone too.
Thank you for the explanation! :)
“By moving back into the property for at least two years, John could eventually sell it tax-free under the primary residence exclusion.”
Isn’t this amount prorated based on years of non-qualified use?
Unless he lived there as a primary residence beforehand I don’t believe he can get the full capital gains exclusion.
Indeed, but even after pro rating the gain, it’s still is about $500,000 or more in capital gains. So it would be able to use out the entire exclusion amount.
See: https://www.financialsamurai.com/how-to-strategically-use-the-tax-free-home-sale-exclusion-every-two-years/
Always a great post ! I haven’t looked into this much, but recall reading about Delaware Statutory Trusts. From my prior reading, this allows the benefit for a 1031 without being a direct landlord.
Good reminder on the DST! Will dig into that again.
Another option is to sell the property and hold the financing thereby spreading out the gain over the life of the loan, even if you accelerate the payoff to 5 years. Also, many insurance companies will cancel the insurance policy if the property remains vacant.
Can you share with an example of how that would work? The seller holding the financing. If I sell this year, doesn’t the sale get registered for this year, regardless of the seller financing?
The sale is recognized in the year of sale, but only the capital gain portion is recognized based on the amount received for each year until the loan is paid off. Interest income from the loan is also taxed. See Form 6252 for more information. The seller becomes the lender instead of a bank.
Gotcha. So let’s say the house sells for $2.5 million net and costs $2 mil for a $500,000 capital gain. The seller does seller financing and pays $100,000 in mortgage interest a year.
Are you saying the seller only has to pay capital gain on the $100,000 in mortgage interest received in year one? And then another hundred thousand in year two, and so forth?
Just wondering the specific mechanics. Thx
Seller Installment Loan works like this:
1) Calculate % sales profit. Profit = sale price minus cost basis minus selling expenses. Sample numbers: sale price ($2.5M) – cost basis ($1.5M) – selling expenses ($150k) = $850k profit/gain.
% Sales Profit = $850k / $2.5M = 34%
2) Payback of principal is taxed.
Sample numbers for seller financing: down payment received year 1: $250k
Principal loan repayment year 1: $30k
Amount that will be taxes as capital gains tax year 1: $280k of which 34% profit is taxed ($95.2k). So year 1, you will pay capital gains tax on only $95.2k rather than the full $850k of profit.
For year 2, it is just the principal loan repaid, so approx. $35k x 34% is taxable ($11.9k).
And so on for subsequent years until the loan is repaid.
3) Loan Interest is taxed as ordinary income. Sample numbers for year 1: $135k interest received. And so on for subsequent years until the loan is repaid.
Thank you! I will write a post on this so more can get educated on this solution.
Another reason to leave a property vacant: multiple owners on the title.
I have seen this happen in low-cost-of-living areas. The kids inherit real estate from the dead parents and none of them can agree on what to do with it. So, the house or storefront sits vacant, for years sometimes, hence the rise in “Vacant Property Tax” laws. It forces absentee landlords to act.
Sam, another great topic. I was wondering if there is an additional option to those you outlined. Let’s call it Vacancy or Extreme Price Premium Option.. Basically, list the property for rent but say at a 50% price premium to what local comps suggest. Thereby, leaving it empty while its listed (at price premium) enabling the owner to deduct operating expenses (Depreciation, Real Estate Taxes, Utilities, HOS fees etc). If it rents at 50% premium so be it and if it doesn’t you can still deduct expenses as its actively listed for rent. I’d be interested in your perspective on this one.. Best regards, Dan
Thanks Dan! Interesting idea—kind of a “have your cake and eat it too” strategy. My understanding is that as long as the property is truly available for rent at a fair-market rate and you’re making a genuine effort to rent it, the IRS generally allows the deductions. But if the asking rent is way above market and it’s obvious you don’t really intend to rent, the IRS could view it as a personal use property and disallow the write-offs.
In other words, you could test a slight premium to gauge demand, but a 50% markup might be hard to justify if you’re audited. It’s a creative approach though, especially in a rising market where you’re not in a hurry to fill the place.
The thing is, no rental income, not much value in having any deductions.
If you’re looking at it purely from a numbers perspective, deductions without rental income don’t really move the needle in the short run.
Here’s why:
* No income = no offset.
Rental deductions—mortgage interest, property taxes, depreciation, repairs—are meant to reduce rental income. If there’s nothing coming in, there’s nothing for them to offset.
* Passive loss limits.
Most landlords can only deduct up to $25,000 of “passive losses” against other income if their adjusted gross income (AGI) is below $100K, and that benefit phases out completely by $150K AGI. Above that, the losses usually get suspended—you can’t use them to lower your W-2 or business income right away.
* Carry-forward potential.
Suspended losses aren’t lost. They accumulate and can offset future rental income or reduce capital gains when you sell the property. That’s where the long-term value is.
So if you’re high-income and don’t expect near-term rental income, “deductions” mainly create paper losses you can bank for later, not immediate tax savings.
That’s why I generally see more practical value in a vacancy strategy only if you believe rents will rise, you can eventually rent at a strong rate, and you’re willing to wait for those carry-forward losses to pay off.
Best,
Sam
Given that the property has no mortgage, his future gains are based on his purchase price rather than on a mortaged property where your actual investment is a small percentage of the purchase price and hence your actual percent gain will be much higher. Thus I would think it much better to sell the property and invest the funds elsewhere.
30 to 40% gains over the next decade could just as easily be obtained with a ten year treasury bond given the current rates.
Indeed. But what about the cost of paying $166,000 in capital gains tax now instead of waiting 2 years and not having to pay if sold then?
In that regard, it would be better to just keep it vacant and not collect rent and ride potentially two more years of appreciation.
But only if he moves back into the house. If he has no desire to live there, then even given the capital gains it still would make sense to sell since if he waits he will still owe capital gains.
We don’t have enough information to really answer your question. Why can’t he do a 1 year lease with no option to renew? Does he have a property manager? Can he sell it now and do a 1031 to a property in Charlottesville that he rents out now and eventually occupies? There are MANY much better options that keeping the property vacant. I don’t care how much money you have. I own 3 rental properties and was in the same position with one of my rentals. I had a major flood; my tenants were dealing with plumbers, insurance adjustors, remediation and we ultimately let the tenants out of the lease because the entire experience was so disruptive to them. We have no mortgage, carrying costs are very low and I have a property manager. We ran the numbers but ultimately decided to keep it vacant for a month, take our time to fix the leak, make the repairs and updates and then we’ll re-rent it for a few more years. The luxury is to be able to leave it empty for a few weeks for renovations or to wait for a higher quality tenant. I would NEVER leave a property vacant long-term. What if there’s another flood? What about squatters and drunk teenagers looking for a place to hangout? My husband and I are close to retirement so we will sell it when we are in a lower income bracket.
The issue is, once a tenant is in, it’s hard to get them out if they want to stay longer than a year or a year and a half. Sometimes, you will have to buy them out, which costs money, and the process could also take 3 to 6 months.
So with only 18 months away from Johns plan of relocating to Charlottesville, Virginia, there is a risk.
And even if he finds a tenant that says they will move out within 18 months, there are still no guarantees because life always happens.
Some of us were landlords think about zero turnover and not daring to keep a unit vacant for several months just to find the perfect tenant. So hopefully, this post helps those landlords think more about having a more balanced lifestyle with less need for always optimizing.
First, hire a property manager and have them deal with tenants. Sounds like it would be well worth the fee to the manager.
I agree with Kim. You could definitely be involved with selecting the tenants. More than maintenance which the PM would deal with, you might then care about how tough the tenants will be on the place.
I also might explore more about moving back into the place. Not sure how much better the rental house they are living in is than the place they own and are considering to sell. That would, as you said, help him sell tax free in 2027 or later, once they have those 2 years in place, and teams up nicely with his planned move to VA. And he’d get 2 more years of appreciation.
This seems silly to me. There are plenty of other ways to diversify assets these days. John still will have issues with capital expenses such as roof, landscaping, hvac, etc. You have risk of break ins, squatters. Someone will still need to check in and walk through on a regular basis. At rents this high, a full time manager eliminates most of his involvement, I’m not sure I understand the “hassle”. One thing I would say is valuable though is the step up basis at death as you mentioned as well as the nice write offs each year for expenses, especially depreciation. He could also consider a below market rent with the goal of getting someone in there long term; he could write a lease for 3-7 years with a repair “deductible” of say $1000. With below market leases, he could be very selective with tenants. Lots of options I think, it’s an amazing situation to be in although personally I would not keep vacant but consider some alternatives as I wrote. Interesting topic.
Thanks for sharing this perspective—it’s a good reality check. I agree that sitting on a vacant property isn’t as passive as people might think. Even if it’s empty, roofs still age, landscaping still needs care, and there’s always the risk of break-ins or squatters. And yes, a professional property manager at today’s high rents can remove most of the hands-on hassle if the goal is simply less work.
I like your suggestion of a below-market, long-term lease with a repair deductible. That could strike a balance between preserving the asset, collecting steady income, and keeping tenant quality high. The step-up in basis at death and annual depreciation are definitely underrated benefits, too.
The idea of this post is: how rich do you have to be to have the luxury to keep a rental property vacant?
What do you think?
Yeah, I guess my brain automatically went to the logistics of the situation and how to make best financial sense of it. I think that’s kinda your audience but I do like how you challenge us to think in a “lifestyle” manner as opposed to always optimizing every asset; that is why this is by far my favorite financial newsletter (it’s the only financial webpage on my favorites tab!). I guess in a sense it’s not much different than holding onto a vacation or any other kind of property. Bringing back to the point of the article, yes, I would agree with your chart on Example Comfort Levels.
My vote would be to sell. What a good problem to have! It seems like John is already forecasted to have a financially sound retirement and the juice here isn’t worth the squeeze here. What is the expectation that carrying the property will measurably improve his quality of life? What are the chances that carrying the property could make his life measurably more difficult?
If you aren’t actively seeking tenants, the deductibility of the carrying costs with regard to taxes come into questions. Sometimes insuring a vacant property can also be more difficult than you expect. How often will he walk/inspect the property to see if a leak is causing water damage? You could also expose yourself to squatters or some other nuisance – what if someone ends up cooking meth in the house! Even if the overall market appreciates, he is still concentrating a chunk of his wealth in one specific asset. Extreme/pessimistic examples? Yes, but why open yourself to potentially catastrophic headaches/risk when you are just looking for a little extra gravy to put on your biscuit?
If you want to try an be more financially savvy than just selling, perhaps do a partial 1031 into a place in Charlottesville. He can initially rent that out using a management company to make sure it qualifies for the exchange and then perhaps transition to that property to care for his mom. If that property ended up sitting vacant, it would at least provide piece of mind that he would have a location to transition to if/when he wants to relocate there.
This may also be an opportunity to think about this from a bit of an “ESG” perspective. I would feel a little uncomfortable purposefully taking housing stock off the market just for it to sit vacant simply for speculative reasons. Not something I would be really proud to share at my next cocktail party. It hurts people looking for housing as well as the local business that would otherwise be supported by a resident. Some people may entirely discount these concerns, but if the decision was somewhat of a toss-up, why not just go ahead and sell?
It’s not going to sit empty for speculative reasons, just simplicity reasons.
But I hear what you are saying. There is actually a lot of available housing at any given time. It’s more about the quality of housing stock and the pickings of the prospective renter.
Just one look at Redfin, Zillow, or CL and there’s just tons of supply in every city.
From the 2020 census – San Francisco has:
~170,000 families
~63,000 detached single family homes
I only bring this up because I just purchased a home in San Diego and ran the same supply and demand analysis to make sure it was a sound investment. Not sure why you didn’t allow my other comment to post. I’m not trolling, I’m just trying to raise another perspective on this question.