1031 Worth It? Suspended Losses Exceed Cap Gain

[Chris Gottshall]

I'm asking this question on behalf of a client who is selling a property where the total capital gain looks like it will be less than the suspended losses they have accumulated on their tax return over the years of owning the property. The losses were suspended in the past due to W2 income and they are now self-employed, meaning their income tax rate is likely to be lower, if that makes a difference in the answer. I've encouraged them to contact a 1031 specialist, but this question has me curious so I wanted to bring it to this forum for consultation as well. At a glance, and as a non-expert, it sounds like it might not make sense to bother with an exchange if the losses are unlocked at sale. What do you think?

[Bill B.]

It could be offset but it. But so could some future gain instead, if your client doesn’t “waste it” when he could have done a 1031 exchange instead. If they can’t find anything they to exchange it for sure, use the suspended losses. But when they go to sell in the future without a 1031 they’ll owe taxes they could have avoided. 

Eventually their rentals will start to turn a taxable profit and those losses can be “unsuspended”.  I was only “tax free” for about the first 10 years. Once I started paying off loans and raising rents, years of suspended losses went away fast.