How best to take a loss

Question

Here is my situation. I purchased an investment lot in 1998 for $145,000. I sold it in 2007 for $450,000 and did a 1031 exchange with the proceeds and bought another lot for $475,000 The market naturally has dropped since then, but I still would like to sell because I donâ€™t see any signs of appreciation on the horizon. I owe $175,000 and my payments are $1,100 a month so this one could be a slow alligator. It wonâ€™t be a total loss since I own a second home adjacent to the lot and part of the reason for the purchase was to enhance the water view and allow a dock to be built which needed permission from the adjacent owner (me) to build within the setbacks. Anyway, Iâ€™m going to talk to my accountant next week for some tax planning strategies, but thought possibly someone else has been in a similar situation.

Realistically, I think I will be able to sell this lot for $350,000 which will be a loss of $125,000. But, the original price of the first lot when the gain was deferred was $145,000. Will I be better off selling and paying some tax or should I consider another exchange? I wouldnâ€™t mind put my money in something income producing, possibly a beach condo or just pay off some bills and buy some toys. Any input or suggestions from personal experience is appreciated.

Dave Toelkes · Answer

Roberto, You bought a lot for $145K then exchanged into a lot valued at $475K. To complete the exchange, you had to bring $25K to the settlement table. The basis in the first lot became your basis in the second lot adjusted by the extra $25K you paid for the second lot. Your basis in the second lot is $170K, If you now sell that lot and net $350K, you will have a taxable gain of $180K -- not a loss at all. With the long term capital gains tax rate at 15% right now, the federal tax will be $27K. State income taxes may make the total tax hit even higher You can do anything you wish with your profit after you pay the state and federal income taxes, but for that amount of taxable gain, another 1031 exchange is certainly worth considering.

Cheryl C. · Answer

So, you are thinking that the IRS might consider this a sale? That never crossed my mind when we did ours (but it was our primary residence). I really don't think this would be construed as a sale, but let us know what your tax attny says. I had a coop convert to condo and that was considered a sale, so I simply 1031'd.

Roberto Peso · Answer

Dave IMO there are few few areas where land will appreciate for at least a decade. I got my gains between 1999-2005 and sold most of it. Cheryl I've already done the preliminary work. I had a surveyor draw up 2 separate configurations, a big difference is the riparian rights and the corridor for building a dock. Setbacks are no issue. My only concern is an IRS audit where there will be a change in public records for recording a new deed or change. It's a gray area and I won't proceed unless I get a green light from the tax attorney who handled my exchange. I can envision the IRS ruling that the lot size should have remained unchanged even though the legal description remained the same.

Cheryl C. · Answer

Roberto, I did a simple "boundry line adjustment" on two adjacent lots that I owned. It was very simple. I just needed a surveyor to draw up the new lot configuration and have a deed drafted. It depends on your local zoning, setbacks, access, etc. Very easy to take your current plats/surveys to the local zoning/development office for your juridiction and see if it will fly.

Dave Toelkes · Answer

Buying and holding vacant land generally takes a long time to be profitable. That is why I only buy income producing properties. If your proprety generates a positive cash flow, you can afford to hold indefinitely. You make money even if the property value declines. By all means, consider an exchange, but reconsider what you exchange into.

Steve Babiak · Answer

Not true. For a short time (I think about 15 minutes) a post will have an "Edit" link to the left (if you wrote the post); after that short time, there will be an "Update" link to the left that allows for you to communicate any change. The updates are limited to a certain number of characters (although the update lets you type way more than that limit - the message you type in the update just gets truncated at the character limit).

Roberto Peso · Answer

pardon the mangled syntax, apparently posts can't be edited once they're posted.

Roberto Peso · Answer

Dave By â€œlossâ€ I was referring to my loss since the last purchase, I realize the IRS only recognizez the gain since the original purchase in 1998. What Iâ€™m trying to determine is if I should go ahead and pay that 15% now, because realistically, I donâ€™t see any appreciation soon, and quite possibly the market falling more than 15%. I may be better of selling, paying some bills and looking for quick flips, the days of buy and hold wonâ€™t be back for some time Iâ€™m afraid. Chris I doubt Iâ€™ll be selling the house, if I do sell the vacant lot I will cut down a lot more trees to maximize the view. I may explore the possibility of restricting the deed to protect the view. I might also see if it is legal to reconfigure the lot(s) with new surveys, however, I doubt this would be allowed since I own the adjacent site. I was able to improve the water view on the improved site immensely, from about a 25 degree view to about 55 degrees.

Chris Sweeney · Answer

You have any interest in selling the 2nd home with this lot? Sounds like a nice value add with the view and dock and if you sell it what kind of value are you going to suffer on the 2nd home? Do the comps have views and docks and you'll be one of the few without?