Cost Segregation Done on Property, when is the best time to sell?

Question

Hello All,

A couple of years ago we did a cost segregation on a condo we own in SF. I helped to balance out a year of high gains due to stock cash out. The condo value is still slightly lower than what we purchased if for in 2017 but inching up closer. Does anyone know whether it is better to sell it when it is below market value or if it really doesn't matter? Thanks in advance for any perspective.

Greg

Dave Foster · Answer

@Greg Miller Because of the cost seg when you sell the property, you would have to recapture a lot of the depreciation even if you sell for "a loss" as @Bill B. said.

@Sean Graham is spot on, a 1031 exchange would allow you to defer that depreciation recapture, and if you purchase larger more real estate than what you sold, will give you an additional depreciable basis. Which could help with this years income problems.

Bill B. · Answer

It doesn’t matter if you sell it for more or less than your purchase price as you’ve adjusted your cost basis with the depreciation. If it’s providing a bad return let it go. You’ll still owe depreciation recapture even if you avoid capital gains tax.

Sean Graham · Answer

You might also consider buying more real estate in order to get more depreciation to offset the depreciation recapture here. Some would call this the lazy 1031 exchange.

Also, see your tax depreciation schedule to see how much you took @Greg Miller. Your tax CPA should be able to assist with all of this.

Ashish Acharya · Answer

@Greg Miller Since you did a cost segregation study, selling the condo will trigger depreciation recapture tax, which is taxed separately from capital gains. Whether you sell below or above your purchase price, you'll still owe recapture tax on all depreciation claimed (up to 25%).

The depreciation you've taken in prior years decreases your cost basis, which might make the sale a taxable gain even if the sales price is below your original purchase price. Example: If you originally purchased for $500,000 and took $100,000 in depreciation, your adjusted cost basis is $400,000 ($500,000 - $100,000). If you sell for $450,000, your taxable gain is $50,000 ($450,000 - $400,000).

Selling below your original purchase price could offset some capital gains tax, but it won’t eliminate depreciation recapture. If you’re at a loss, consider holding until the market recovers or using a 1031 exchange to defer both capital gains and recapture taxes.

If you’re expecting high income in the year of sale, timing it strategically to offset gains with capital losses may help. A real estate CPA can help you analyze the best approach based on your tax situation.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Greg Miller · Answer

Thanks Bill, any idea how to determine depreciation capture? Is it a percentage?

Cost Segregation Done on Property, when is the best time to sell?

Cost Segregation Done on Property, when is the best time to sell?

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