Sell Portland duplex with tax hit to purchase a closer property?

Question

I own a duplex in NW Portland that has been a great investment for me for the past 12 years...it currently nets me about $900/month. In the last year I've moved east about 2 hours away and it's beginning to become a headache to maintain the duplex from this distance so I'm contemplating selling it. I'd like to do a 1031 for a similiar property here in the eastern gorge, but there really aren't any properties available that are of equal value (about $425k total, $195k still owed on duplex) to purchase, as this area is much cheaper than the PDX area. According to the 1031 rules I've researched, I'd have to find another property of equal value that I will still have an equal amount of debt on.

That means that to sell I'll probably have to take the long term tax hit. The proceeds would then be used to purchase or build another property here in my area.

Would you sell in my position and just take the hit just to be out of the property? Anyone ever been in this position and regretted selling? I think I know the right answer but I'm just looking for any possible suggestions...

Thanks!

Mike H. · Answer

You don't have to buy a property that is greater than the one you have. I believe you can do a partial 1031 so that you're shielding a portion of your gain and paying taxes on the rest. Or just buy a couple of properties that total the same value.But I don't know that I'd have a problem with just paying the taxes now. Long term capital gains tax is 15%? Recaptured depreciation is going to be the hit though (taxed as regular income). If the property had a tax basis of say 280k and was depreciated for 12 years, that would be roughly 10k a year or 120k in depreciation? You're going to be hit with a tax bill of 30k just for the recaptured depreciation alone maybe? But here's the other thing. If you turn around and buy a 250k property where you're at for say 200k, then you'll be getting all that tax money back anyway.

Derrick Aragon · Answer

@Jeff WebberI am not an expert in the 1031 but you don't have to buy one property, you can buy 2 (or whatever) with that money it doesn't have to be 1 to 1. If you are looking for PM message me. If you want to sell there might be a way to structure it shoot me message.

Benjamin Herrmann · Answer

@Jeff Webber I see you moved east last year. Did you live in your duplex prior to the move? If you have lived in your home for at least 2 years out of the last 5 years you should qualify for $250,000 Tax exemption on your gain if you're single and $500,000 if you're married. Of course I am not a CPA and you would want your CPA to confirm that. If you are self managing it would be tough being 2 hours away, however, if you have a competent property manager your headache could go away or at least significantly decrease. I say that because it would be challenging to find another deal that would net you $900/month. Another option is owner financing. Since you currently have a mortgage on your duplex you would have to be careful not to violate the "Due-On-Sale Clause". There is ways around it like a Master lease or a 30 year lease option that reduces the principal with each payment. Owner financing gives you the ability to collect cash flow without the responsibility of being a landlord.

Mathew Wray · Answer

Hey Jeff,I know you posed a tax question, but as you know there are other considerations as well. Property tax in Portland jumped with all the levy’s and assessments that hit this year (and I don’t think that’ll stop in the future) while the city council wants to blame the homeless situation and housing crunch on landlords and have us be the only ones to foot the bill. And are pushing to make “renter protections” permanent/angling fit rent control. Since I live here, I still think investing here can make sense, but if I lived at a distance AND self-managed I might reconsider, as you are doing. I agree with the other commenters that you can find a good PM to manage it for you or do a partial 1031. Jay is right that Hood River should have some inventory. Even if they pass more anti-air B&B laws, people will still need a place to live in a great city-might be some good deals coming up. When it boils down, I see you’ve really only got two options if you’re at a distance and tired of managing yourself: get a PM or 1031. (Edit: Just saw we posted at the same time and you’re not interested in the PM route, sorry for the redundancy!!!)Let us know what you decide/find if you do 1031.Best of luck! Mathew

Dave Foster · Answer

@Jeff Webber,Some great feedback for you here. You've got all kinds of options to defer all or some of the tax.1. Sell and 1031 into more than one property (allocate the proceeds however you want)2. Sell and do a partial exchange. The requirements are that in order to defer all tax you much purhase at least as much as you sell. But if you purchase less than that you can do so and pay tax only on the difference. Depending on how much less you buy you could still see some tax savings on the 1031.3. Do a combination of numbers 1 and 2.4. Sell on an owner carry note. You'll pay full tax but you'll spread it out. and if you get enough down payment you could use that to purchase your next property.5. Last and yes least - if you've run the numbers and they still make sense then sell pay the tax and buy the next all star investment. A 1031 needs to improve your situation from all angles or it's not worth doing.

Jeff Webber · Answer

Thanks for the responses! No offense to anybody here, but I don't like to use property managers.@Jay HinrichsYes, HR is definitely an option but I haven't had much luck with finding properties there that would equal my cash flow. I will start looking harder in the next few weeks to see if anything new has popped up on the market. @Benjamin Herrmann I fell out of the 2 of 5 year window two years ago, so that's out. I wish though! @Derrick Aragon I'd be interested in hearing what you have in mind for structuring the sale...PM coming.@Mike H. My gut feeling does say to just pay the taxes. Total tax bill, according to my CPA, will be in the $40-50k range. I also like the way you think about recouping that tax money on the next deal!Due to the price appreciation of the duplex, I think I'll be able to use the proceeds from the sale (after taxes) to fund another property closer to me that will come close to the cashflow I'm currently getting...but I will own it outright. That alone might make paying the taxes worth it to me!

Cody McManus · Answer

If it still nets great cashflow, why don't you hire a property manager? You'll still receive a great amount in cashflow and the headache of maintenance will be lifted off of you!

Jay Hinrichs · Answer

how about hood river there are nicer properties there that would be closer to you... Air bnb would work well there.