Sell NYC rental property outright vs 1031

[Anand George]

Hi everyone,

This is my first post on BiggerPockets :) I am excited to join this community!

I am looking for some advice on tax implications wrt selling my rental property in NYC. I own a rental in the Financial District of Manhattan. It's a bad investment (negative cash flow of around $1200 per month). Therefore I am planning on either selling the property outright and taking the tax hit or doing a 1031 exchange for multiple properties in a more desirable market such as Dallas, TX or Atlanta, GA. I am currently a California resident.

So that I can compare apples to apples, my first step is to calculate the amount of money I'll be able to take home if I sell outright. Can you folks let me know if you see any major issues with my calculations below? I really appreciate you time and help.

Purchase price in May 2007 = $535,000

Estimated sale price = $620,000 (based on conversation with trusted real estate agent)

Net Adjusted Basis = $301,546 (taking depreciation into account which is ($535000/27.5) * 12 years = $233,455)

Costs of Sale (commissions, fees, etc.) = $62,000 (assuming 6% for real estate agent commissions and 4% for other closing costs)

Gross Capital Gain = $256,454

Remaining Mortgage Balance = $330,000

Recaptured Depreciation (at 25% of total depreciation) = $58,363.5

Accumulated Passive Losses to date = $157,000

Net Capital Gains (Gross Cap Gains - Losses) = $99,454

Federal Capital Gains Taxes = $58,363.5 (All from depreciation recapture. $233,455 of Gross Cap Gains account for depreciation and remaining $23,000 of Gross Cap Gains offset by Passive Losses)

Reduction in overall Federal Taxes paid due to remaining Passive losses (assume I pay 25% Federal Taxes on my overall income per year) = $33,500 (there is still $134,000 passive activity loss left after offsetting the $23,000 Gross Cap Gains)

California State Taxes (at 12.3% of Net Cap Gains) = $12,233

Gross equity = $228,000 (Sale price - Cost of Sale - remaining mortgage balance) 

Net Take Home Cash = $228,000 (Gross Equity) - $58,363.5 (Federal Cap Gains Taxes/depreciation recapture) - $12,233 (California Taxes) + $33,500 (Fed tax reduction from remaining passive activity loss to offset ordinary income) = $190,903.

Does the above seem reasonable to you? Am I missing any additional costs? Making any wrong assumptions? 

Thanks again!

-Anand

[Jason Lee]

You're missing NYS and NYC transfer taxes which will come out to about 11-12k. Hopefully you didn't have to pay them if you purchased from the sponsor. Maybe another 3-4k for your attorney and condo fees.

620k sounds like the right asking price, maybe a little optimistic for a final sales price considering active comps and all the available inventory.