I would sell. Long term capital gains rates aren’t that bad, you’ll pay 150K on 1 Million in profit and I’m guessing you have better things to with your time than go live in your own rentals for the purpose of saving 38K / year (150K / 4 years = 37.5K)

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Go talk to a financial planner who has a real estate focus. If you are still trying to build your wealth and are not near retirement, consider http://www.pacblueinvestments.com. Give them a call and they can give you some options. They do run real estate investment classes, but they are worth it.

Another one of those mysterious fires that seem to be breaking out in epidemic fashion? Just kidding. 15% long term gains and some depreciation recapture if you depreciated, really doesn’t seem that onerous to me, if you really want out of the buis. Making up your mind is probably more important than the tax consequence, due to falling market.

SDR: No I am not using a panic selling slant :).

Depreciation recapture on 1M worth of rental property could very easily bump one up into the AMT realm of paying 15% on gains + full fed income taxes on recaptured + state on the whole ball of wax.

Option 3 is now out as well. When converting back from rental to owner occupied, you must live there a full 5 yrs to get the write off. 2 of the most recent 5 only goes for owner occupied converted to rental.

The big question is what is your cost base on the properties?? If you depreciated little/none, I would eat the 24%.

If you depreciated enough to qualify you for AMT then your only real option is to 1031 or hold. Depreciation recapture is normal income and you will give 50% back to uncle sam in that case… that party is BYOV (bring your own vaseline)!

I disagree with the assessment that Option #2 “doesn’t get rid of anything”.

A 1031 exchange could significantly reduce your downside risk. You could consider 1031 exchange into a less bubble-icious region. San Diego is significantly over-priced compared to say, Kansas City or Nashville.

Option 3 is now out as well. When converting back from rental to owner occupied, you must live there a full 5 yrs to get the write off. 2 of the most recent 5 only goes for owner occupied converted to rental.

I thought you had to OWN the property for 5 years in the case of converting back to rental use. Can you point to the IRS guidance that says you have to OCCUPY it as a personal residence for 5 years. I read Pub 523 for Tax year 2006 and didn’t see the 5-year personal use for the case of converting rental back to residence addressed.

Considering Option #1 …

Once you figure out your potential tax liability if the property is sold here is the calculation I would do:

Let’s assume for simplicity that your cost to sell outright is 5% in commissions/costs of sale, plus a tax liability of about 25% (Fed=15%, state =9.3%, depreciation recapture is 25%).

point to ponder …

1. What is the current income produced from the property after accounting for any maintenance, vacancies, prop management, and repairs ?

2. How much income can you generate from the remaining cash left after your sale.

Example:

Let’s say you net about 35,000 annually from these properties.

If you bought in ancient history your tax basis would be low. So let’s say you would net from sale 1M, minus 50K expenses/commissions, minus 250K in taxes. That leaves you with 700K. In this example, to get the same 35K annually, you would have to net about 5% from your investments. Money market/CD territory will beat that.

If you are netting 50K annually, then it would take over 7% to replace the rental income and it gets more difficult to replace that income with a conservative investment.
Plug in your numbers and see if this option makes sense … or not.

Then, compare it to owning say 930K (after commissions and 1031 fees) of property in another less-bubbly area.

Or, if you really hate taxes, try option #5: DOnate it to charity. It will save you tons on taxes.

Scruffy depreciation recapture is an important variable that would help to analyze your situation in a more efficient manner. How long have you owned each property, what is your original basis, and how much have you depreciated out is important.

To be honest I would not even begin to try to answer your question without a more comprehensive look at your overall portfolio. Do you have any other capital gains losses you are carrying from other investments, etc…

Do not, I repeat do not try to answer this question as you have posed it… this is a question that you need to sit down with a financial planner and analyze.

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One thing not mentioned but unfortunately they are now highly regulated are private annuity trusts. These are pretty nice instruments for highly depreciated assets. However, the IRS now provides a high level of scrutiny for these instruments. If utilized properly they can save you a ton of money in deferred tax savings while providing a robust income stream.

Anyways, I believe there are other factors you may have to consider and should work with your financial planner to do so in order to come out with an ideal solution. So I mentioned the PAT because it was an option you did not mention.

SD Realtor