Which duplex to sell?

7 Replies

Same street, same floor plan, no liens - one recently inherited, the other owned for 25 years (fully depreciated). From a tax perspective, which duplex should we sell?

This would be a good conversation to have with your CPA.

The one you just inherited should have a stepped up basis equal to the value on the date when you inherited it. So, if you sell it, your gain would be only the difference between the net sales price and that basis. After costs, that could actually be a loss, which you would be able to offset against the other income.

I assume the owned for 25 years one has been owned by you for 25 years. Since its fully depreciated (or, almost, since residential property is currently depreciated over 27.5 years), your basis in that property would be close to just the land value. So, you will have a pretty large gain on that one. You'll be subject to depreciation recapture tax on the amount of gain up to the amount of depreciation taken (or, that could have been taken if that's more) and then capital gains on the rest of the gain. Currently, those are 25% and 15% respectively. So, clearly the tax bill on this property is going to be much more.

Jean,
Have you considered a 1031 exchange for the property that is fully depreciated?
If you are looking to diversify into another investment, it might be worth investigating that option.
Chris

Hi, is it a cash sale or an installment sale, makes a big difference! (And yes, you could take that as a suggestion to sell either one under an installment/seller financed transaction). Got back just in time under the edit button! Installment sales deffer capital gains as realized with interest income. Any part of a future note payments can be sold for a discounted present value or some smaller lenders will accept about 70% of par for collateral on another loan. It doesn't have to be your daddy's contract-for-deed any longer! Good Luck, Bill

Actually our goal is two-fold:

1. to get cash to pay upcoming property taxes (OK, poor planning).
2. to fund a new entity to rehab properties

My husband, a sole proprietor, has owned a few duplexes for years. He's been able to handle these properties with minimal management - but his father died and left him more properties - now he needs to get serious about this business. (Business skills are not his forte.) I have a business background and had success rehabbing in California with another partner (http://lowtech-ventures.blogspot.com).

He has agreed to partner with me to form an entity with the infusion of cash from that sale and rehab houses, and sell or rent them. This includes bringing in the remaining residential properties and managing them with a business focus and structured rules and procedures (so property taxes are in escrow).

Given this reason and your suggestions:

1. Chris - Can you leverage a 1031 exchange where the funds go into the new LLC?

2. Bill - Is there a creative way where we can seller finance to another company (one of my companies), then sell the note to get the cash infusion? This is ideal as I really don't want to sell an income producing property.

Thanks Guys!

Jean,
My understanding is that a 1031 exchange has to be a like investment and the money will need to be held by a 3rd party so I am pretty sure the answer to your question is no.
I would recommend that you read the 1031 articles here on bigger pockets to get a better sense of what you can and cannot do.
The key point to remember on a 1031 exchange is that someone else will have to hold the money until it is reinvested.
If you are trying to raise funds to pay taxes, the 1031 exchange is probably not a workable plan.
Good Luck

How about taking a loan out on the properties? As long as you keep the P&I to less than 50% of the rents (read in the Rental Property forum about "50% rule"), you'll be break even on the rentals and you'll have a chunk of change. NOO rates are about 6% right now, which is the cheapest money you're going to find. And there are no taxes.

If you sell the note on an owner financed note, you're going to take pretty stiff discount on the face value of the note.

A 1031 would make sense for that property you've paid off and held for a long time, as long as you're willing to put the money back into another rental. 1031's have to be like for like, so you can't take the money out for other purposes. You can take part of the profits and 1031 the rest. That's called "boot" (don't ask me why) and would be taxable. But only the boot is taxable and whatever you roll into the new property is not.

Loans are tough right now - even though we have short of $1m in clear assets, our income is unverifiable. I've been unemployed since January and the income from the duplexes won't show up until we file our tax 2009 tax return.

I've considered hard money on one of the properties - but sometimes it just seems cleaner to sell one.

From what I have heard, the newly acquired property is the better one to sell from a tax perspective.

Do you know anyone wanting an income producing duplex in Austin (a city with projected growth of 25% over the next decade, near a community college, considered the "north central of Austin", the "musical capital of the world")?

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