For Many Real Estate Investors Losses Can Be Golden — If You Act

Posted @ 5:31 pm - Filed under 1031 Exchanges, Buying Income Property, Capital Growth, Cash Flow, Depreciation, Palo Alto, Real Estate Markets, Retirement, San Diego Property Owners, Selling Income Property, Sominex Account, Tax Shelter

Every boom to bust cycle creates a new if temporary class of real estate investor — often more than one. Sometimes the results of the boom generates the new class, sometimes the consequences of the bust. My favorite new kinda client these days is the one who owns a couple kinds of property — those acquired long ago with significant post crash equity — and those worth less than what they paid.

And there lies the gold, as in golden opportunity.

Let’s get rid of some phobias first, OK?

1. Chances are, I’m gonna tell ya to eschew the acquisition of local property for superior regions. If you’re in San Francisco, Palo Alto, Walnut Creek (Bay Area in general), get over it, and resign yourself to owning income property elsewhere. If you own properties in areas currently living through the sequel to The Grapes of Wrath — Michigan & Ohio come quickly to mind — same message. Get over it already. But then what? Get Outa Dodge for Heaven’s sake.

2. You really don’t hafta manage your own stuff. Gimme a break. How many hundreds of hours have you spent away from family and/or other more exciting activities (Standing on your head in a corner stacking BBs with your nose comes to mind.) so you could meet potential tenants who never showed up? Again, get over it. Others can do it, no doubt better too. Ouch, sorry.

3. This is one for which we’re exceptionally sensitive. Prepare to stretch your comfort zone if needed. Many investors have owned properties long after prudence dictated they should’ve been traded. Why? Comfort zone. The decision is one of feeling comfortable with the inferior status quo, or allowing yourself to stretch a bit in order to vastly improve your retirement scenario. It really is that simple — and that difficult. We all hafta deal with this issue all the time, don’t we?

Alrighty then, back to the new class of investor.

Take a seriously objective look at your portfolio — how many are probably past due for an exchange to greener pastures, and how many were booboos? If you can afford to sell the losers at a loss without using a short sale, you might be part of the new class.

The golden opportunity? It’s possible you’ll be able to sell the losers and use those losses to offset the sizable capital gains on your winners. Since negative cash flow is often attached to devalued income properties, you’ve killed two birds with one stone — got rid of an albatross or three while ditching who knows how much red ink each month.

Here are the multiple benefits of moving now, in order to mine this gold.

1. You’ll be able to avoid a tax deferred exchange, which means the depreciable basis in your newly acquired properties, purchased from the net proceeds of your ‘good’ props will be hugely impacted in a very positive way. Translation: Your annual depreciation (tax shelter) will increase big time — not only compared to what you left, but what you would’ve had if you’d exchanged instead of used a straight sale.

2. Down the road, when it’s time to sell/exchange the new stuff, your capital gain will be greatly reduced from what it would have been had you exchanged into it.

3. If your job income is $150,000/yr or more, this also means you’ll be accumulating a much larger cache of unused depreciation which will be available to you to offset even more capital gains in the future. For example: If you used your net proceeds to purchase about $1 million in property (using 20% down w/cash flow) your annual unused depreciation would be, depending upon what you bought and where it was located, in the range of $30-40,000 or so. Let’s use the lowest figure, $30,000 — this means a 5 year hold would generate well over $100,000 in net capital gains offset if needed. How cool is that?

There are investors everywhere who see themselves as they’re reading this. Good. Here’s your first step. Find out if your loser property(s) can be sold for a loss, but without you putting any, or at least not too much into escrow to close it. Then speak with your tax guy/gal to ascertain how much of a loss it will be in fact — on your tax return.

Then figure out what the capital gain would be on all of your properties individually. Compare the loss(s) with the gains. Also, don’t forget to nudge your tax pro to remember to apply any unused depreciation against the capital gain too. We just closed a sale for a client who offset his entire 6-figure gain using available unused depreciation. Most folks however, find a combination of losses/depreciation to be a winning way to go.

Once you’ve figured these things out, don’t waste time. Put them on the market. You want them to all close escrow in 2009. It’ll make your life much easier that way. The results will be to your liking, not to mention the turbo charging of your capital growth rate.

The client mentioned earlier has eliminated almost $10,000 in negative cash flow while generating a tidy increase in tax shelter and positive cash flow. Not only that, but he’s not exactly been saddened by the reduced management time.

Give me a buzz if this is speaking to you. 619 889-7100 will find me. Have a good one.

This entry was posted on Tuesday, May 12th, 2009 at 5:31 pm and is filed under 1031 Exchanges, Buying Income Property, Capital Growth, Cash Flow, Depreciation, Palo Alto, Real Estate Markets, Retirement, San Diego Property Owners, Selling Income Property, Sominex Account, Tax Shelter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.