San Diego Housing Bubble News and Analysis

Consider where you are posting. The simple fact that you are here (on Piggington) suggests that you are intelligent enough to answer this question correctly on your own.

I suggest you be smart enough to look for a less curt opinion than the above by lendingbubbleco.

Could you push the time frame out for a while by identifying 1031 candidates but not pulling the trigger until you make a clear decision.

I think it is a close call. Guarantee to lose 200k by cashing out vs. buy low real estate now and take my chances. FYI, I am looking to buy in the Santa Ynez, CA area.

I am interested hearing from the moderate bears about what they would do?

Could you push the time frame out?

I cannot push the time frame any longer as I am near the end of what the 1031 rules allow. I have chosen 3 properties already. Thank you for your reply Rustico

Well, if you are going to lose $200K either way, I say buy the property--because at least then you do own something tangible, even though property values are decreasing. If you think the property will decrease more than $200K, then pay the IRS.

1031 exchange....

I would certainly recommend going the route which pays less taxes. Still, if you are going to invest in California, it will probably be about equal - you pay the $200k in taxes or watch your investment eat up $200k (in cash flow costs and depreciation).

I would recommend investing the money in different areas of the country.

If you are interested, you can call the people at www.pacblueinvestments.com and tell them that you have so-so amount of money and you are thinking of doing a 1031 exchange. They might be able to help you out and give you some options. They can show you some real estate markets around the U.S. that are cash flowing right now and can point you in the right direction as to what your future plans are.

Not every place is in the same cycle as California.

Congrats though on having such an enviable problem...

"I suggest you be smart enough to look for a less curt opinion than the above by lendingbubbleco."

Whatever, realtor-boy. By the way, you really ought to quit capitalizing the word "realtor" everytime you type it, unless you are prepared to put the trademark notation beside it. We don't capitalize "used-car sales manager" do we?

I suggest that when one has an $800K question that he/she pays a few bucks and gets proper counsel, rather than asking for help from a bunch of anonymous know-it-alls on a bearish housing blog;)

I am NOT a CPA or an Attorney. I have posted about these vehicles a long time ago but do not recall the response. Similarly the IRS may have tightened up on the rules... Ask your CPA or a trust attorney about a private annuity trust. Basically these are vehicles for highly depreciated properties that enable potential sale of the property and a massive tax deferment. The property is transferred to a trust. The sales proceeds go to the trust. The money is in the trust and can be invested to earn mo money. You have to take an annual payout at which you are then taxed. As you can see this is a very nice way to defer taxes, and earn income on the nut.

Note this is HIGHLY speculative on my part. I FULLY EXPECT other posters here to blow this out of the water or that the IRS has clamped down on these vehicles. Also this is something that is highly specialized. Of course now I just reread your post and see that you have already sold your property. So this is now a moot post as you would need to move it to a trust prior to the sale. Also the private annuity trust is highly specialized... oh well... I will not delete this...

If you are gonna 1031 make sure the funds go to the accomodator... etc... dont screw that up...also if your gonna 1031 do it with the knowledge of future depreciation and that you will simply ride out the storm.

Personally I have missed the boat many times on pocketing alot of cash simply to avoid paying the government. Seeing as the tax rate in the years ahead WILL BE MUCH HIGHER (another speculative statement but I believe this to be true) then it is now, it may not be a bad idea to pocket the cash now...

Do you think taxes will be lower in the next administration?

SD Realtor

pay a few bucks and get proper counsel

I have found that there are many very bright opinions on this board. Really it is a matter of paying taxes of 200k or take a chance on the future real estate market. Other than this blog, I know of no other "proper counsel".

It is completely appropriate to capitalize Realtor. Any title can be capitalized---Investment Banker, Teacher, Social Worker, Box Office Manager, Engineer, Day Care Provider, Home Loan Specialist, Salesperson, etc....

gb,

What kind of property did you sell and what kind of properties and locations are you comfortable with. That info might help would be respondents(Realtors or otherwise).

Four out of five times I'd say find the best 1031 exchange you can, do your due diligence and if it makes sense then do the exchange and avoid the taxes.

Right now, however, unless the exchange really looks juicy... I'd just pay the taxes and wait. That's just me.

Don't get me wrong, the 1031 exchange is a great thing. But I've found that a lot of people go through a lot of brain damage to avoid paying taxes and end up just wishing they had paid the taxes and been done with it. Just something to think about.

kind of property did you sell?

I sold a 5 plex with cash flow and am looking at a sfr vacation rental in Santa Ynez. Thanks everybody for their input. I am leaning towards a compromise and might buy one property in the 800k range and pay taxes on the remaining 300k

Has the transaction already closed ??

If you have taken the money from escrow, it's too late to do a 1031 exchange.

Has the transaction already closed ??

Funds are with an accomodator and must close Escrow on an upleg property by Dec 15.

Dec 15th closing meaning that you closed escrow on your 5 plex on June 15th ?

Paying the income tax is throwing away $200K FOREVER.

Buying in CA is not your only option. For a full 1031,
You will probably need to purchase a property of equal (or greater) value, AND carry the same amount of debt that you had on what you sold.

Although you stated your selling price, what was your final amount of debt, and how much cash do you now have ??

Buying a $1.5M+ multi unit residential complex out of state in a stable market can bring you a cap rate of 10%++

With $800K in cash, depending on the rest of your financial picture, I would consider properties in the $2.5m range with 30% down. The gross rents could easily be in the range of $20,000-$25,000 per month and your adjusted depreciation would be huge, carried forward if not needed at this time
and providing you with an excellent stream of income.

If you are looking for long term gains AND don't need the cash, I cannot fathom why anybody would recommend paying Uncle Sam $200K and walking away with the cash.

Conservatively, that $200K would be 40% down on a $500K building, still providing you with great net income that would be ZERO from $200K paid in taxes.

Again, I am NOT talking about buying in CA.

There is a 45 day identification period and 180 day closing date, so I am confused by your time line.

If you need to CLOSE by Dec 15th, it's already too late to identify.

SORRY, I missed the post where you state that you alreday identified your 3. My bad.

Next time, before selling this type of appreciated property, you may want to consider a Charitable Remainder Trust (CRT), especially if you are older.

The Charitable Remainder Trust is the ONLY vehicle that will allow you to completely bypass all capital gains tax due on the sale of property. In return, you will receive an income stream based on the appraised value of the property before the sale, a substantial charitable deduduction to offset taxes, and you will be able to benefit your favorite charity or charities after you pass away.

They are very flexible. The only real "downside" is that you must leave at least 10 percent of the initial appraised value to the charity after you pass away. However, if you have this type of taxable gain, that would be nothing and you would be helping your favorite charity and not Uncle Sam!

Many people who are no longer looking for growth and are seeking income for retirement (while bypassing the cap. gain taxes and no longer having to manage the property) chose a Charitable Trust. They can also be formed after death minimizing estate taxes, etc. Personally, I know of a 40,000,000 CRT. They are a perfect way to get off the 1031 merry-go-round.

Check with an experienced estate planning attorney/firm or a large national charity for more information.

Concerning Private Annuity Trusts, I heard they have been disallowed by the I.R.S. (However, please confirm this.)

If you buy another property the depreciation is tax deductible. This leans in favor of buying, but just be smart when you buy.

BTW why didn't you resolve this before you sold the property?

To say that the "depreciation is tax deductible" is very misleading...
Your cost basis of the sold property is transferred to the acquired property. You do NOT get to write off more depreciation of the new property based on the selling price, (up to an equal amount) It's still based on your original cost.

Eventually depreciation is recaptured and figured in cost basis.

By buying out of state, depreciation can be much better, as the land value is low in many places, sometimes only 15% of the assessed value, while in CA it can be 50% or more.

Doing a 1031 in that situation can be a bit tricky, but still should be able to be done.

luchabee I thought they may have been taken away from us by the IRS... poop... oh well. So yeah that would leave a CRT as the only viable alternative.....

Again in this case it is of no matter because the seller already has sold the property.... oh well... good post and thanks for that.

Original poster, guys like Surveyor and 4plexowner may have some good out of state recommendations for you for some of the markets they are looking in.

SD Realtor