Selling at a Lost

[Brian Morissey]

Hi,

I am considering selling my rental property which I purchased for $380k 10 years ago and currently has a market value of $310k.  I am married with combined yearly income of  $150k+ .  I have 2 questions:

1) Are 1031 exchanges recommended only if investment/rental property sale generates income? In our case we are selling at a loss.

2) Should we hold on to our rental property that's under water(Sacramento, CA), or sell it at a loss and buy another one in another city where housing prices are appreciating faster(San Jose, CA)?  Which one is more favorable in terms of taxes?

Thanks in advance!

Brian

[Jeff Rabinowitz]

What are the prospects for this property appreciating if you hold longer? Is it currently generating income? Is there a compelling reason to sell now?

​​​If you do not have the reserves to pay the tax that the depreciation recapture will trigger a 1031 may be a necessary strategy if you really must sell now. If you must sell and do have the reserves to pay the tax make sure you do some analysis to determine how long you might hold the property exchanged into the 1031. How will you ultimately exit?

If you plan a series of exchanges that may result in $1 mill., or more, of equity down the line and your ultimate exit is to cash out--you may still have a large tax bill to deal with at the end. In fact, depending on what happens with tax legislation, your ultimate tax bill could be larger than it is now. Locking yourself into the restrictions that the 1031 exchange imposes may not be wise in this case.

If you plan on passing your property to your heirs​​ or on donating it to a charity the 1031 exchange could be a great vehicle.