To Sell or Keep??? Advice please...

[Manish Naidu]

Hi All,

I bought a 3 bed 2 bath condo about 3-4yrs ago. Purchase price was $125K (short-sale). It rents for $1500-1600/month.

My tenant will be moving out next month and I can't decide if I should sell or keep it. The minimum current value of it is around $230K.

Thanks.

[Clayton Mobley]

Sorry for the double post - I have been having this issue on BP a lot lately...

Anyway, I realized I didn't really add much to the conversation there, so here's a little rundown of why the 1031 is an option you should consider @Manish Naidu:

If you sell the current prop, you're netting $100k minimum in capital gains, unless you made sizable improvements to the property. Then you have to consider depreciation recapture -basically, any amount of depreciation you've deducted on past tax returns lowers your tax basis in the property (increasing your capital gain) and any capital gain attributable to depreciation is taxed at 25%. In then end, taxes can eat a huge portion of your profits on this sale.

If you execute a 1031 exchange, you can sell the current prop and roll those funds into one or more new investment properties without paying taxes. Any tax you defer through a 1031 is rolled into the new property, reducing its tax basis so that when you sell the new property you end up paying the taxes on that sale AND the original one (Uncle Sam doesn't like to give up what's his). BUT if you execute another 1031 down the road when and if you want to sell your new properties, you can, essentially, keep deferring taxation until you die, avoiding paying taxes on this sale or any subsequent sales for your entire life.

Bonus: your heirs inherit your investment props with a 'stepped up' basis equal to the market value of the property at the time of your death, meaning all that capital gain and depreciation recapture that's been rolled into each successive property gets wiped out. Basically, if you exchange this prop (purchased at $125k) and, down the road through multiple exchanges, ended up with a prop(s) worth $1m that you leave to your child in your will or trust, they would pay zero taxes if they sold it right after your death. If they hold onto it and it appreciates, they'd only be subject to tax on the difference between the sales price and the $1m value at the time of your death.

I know it sounds complicated, but this is one the best strategies RE investors use to maximize their capital. Essentially its a loan from the IRS, but they allow you to keep rolling the first loan into subsequent loans ad infinitum. You'd need to enlist the aid of a Qualified Intermediary to execute a 1031, and there are some specific rules you need to adhere to, but since you'e not on the market just yet, you have plenty of time.

If you have questions about what you need to do to execute a 1031, I'm happy to give you some more info. There are plenty of QIs here on BP as well that have more experience than I do. If this sounds like an option that would work for you, I'd recommend contacting a QI here and picking their brain.

Best of luck!

Clayton