Clark Howard to Utah Couple With $450K Equity: Sell Now and Keep Every Dollar Tax-Free

Why It Matters

Selling unlocks tax‑free cash, improves financing for the new purchase, and avoids a low‑yield rental that would jeopardize the capital‑gains shelter.

Key Takeaways

• $450K equity can be withdrawn tax‑free under $500K exclusion.
• $2,800 rent yields ~6% gross, ~3‑4% net on $560K.
• Rental income below 1% rule fails to justify holding property.
• Selling reduces new mortgage principal, offsetting higher interest rate.
• Converting to rental risks losing capital‑gains exclusion.

Pulse Analysis

Homeowners with large equity must decide whether to cash out or retain the asset. Allison’s Utah house holds roughly $450,000 in equity behind a 2.9 % mortgage, creating a tempting hold. Yet the IRS allows married couples to exclude up to $500,000 of capital gains on a primary‑residence sale if they have lived there two of the past five years. The couple meets that test, meaning a sale would deliver the full equity amount tax‑free—an advantage that disappears once the property is turned into a rental.

The rental path looks appealing, but the math is unfavorable. At $2,800 monthly, the home yields $33,600 annually, a 6 % gross return on a $560,000 valuation. After typical expenses—vacancy, maintenance, insurance, management fees, and taxes—net yields fall to 3‑4 %, well below the 1 % rule that rent should equal at least 1 % of the property’s price each month. Added landlord responsibilities and illiquidity further erode cash flow, making the modest income insufficient to justify losing the tax‑free capital‑gains shelter.

Selling also improves financing for the new $675,000 home. Applying the $450,000 equity reduces the principal subject to the higher 4.99 % mortgage, lowering monthly payments and total interest. With the 10‑year Treasury yield near 4.30 % and the Fed Funds Rate steady at 3.75 %, rates are unlikely to fall sharply soon, so a smaller high‑rate loan is preferable to a larger one. For equity‑rich homeowners, the combination of tax‑free cash, better net returns elsewhere, and a reduced high‑rate debt load generally outweighs the modest rental yield.