S. Florida Dilemma and Questions - Posted by John W

Posted by John Corey on April 16, 2006 at 21:31:17:


While a L/O is a valuable tool it would serve a narrow purpose in this example.

The window for the tax savings as owner occupied is closing. The L/O would increase the chance the loss would be crystallized.

The present market is flat and no one can accurately predict when it might pick up. Will the market turn negative first or will things just stay flat?

The cash flow with the L/O as you are suggesting might be better (or the consider can be used to subsidize the negative). The legal definition of what a tenant can be allowed to pay for repairs is mixed to be honest. In many places the tenant can not be held to do repairs as the landlord has to provide habitable housing.

Maybe I am missing your point. Other than as a way to reduce the negatives how does a L/O turn around the present situation?

John Corey

S. Florida Dilemma and Questions - Posted by John W

Posted by John W on April 16, 2006 at 19:07:35:

We purchaced a home in South Florida for 250K five years ago. We lived there for 3 years, moved into a new home and have now rented the old home for 2.5 years.

The current value of the home is approximately $650K although the market in S. Florida has gone totally flat. We have had it on the market for sale for 3 months with no interest. This is a nice home, desirable area, waterfront, ocean access, pool, updated etc.

We ar in a slighly negative cash flow on the home $2-300/month.

Our options include dropping the price until it sells, renting it for the long term 5-10 years and losing the capital gains exemtion, or renting it until the market picks back up and doing a 1031 exchange.

Ultimately I think it is best to sell and avoid the taxes, but at what point would we be better off keeping it as a rental? Am I correct in thinking that the break even point is around $70K? So if we sold for more than $580 we would make more profit???

Also, assume we keep it and later do a 1031 exchange and purchace a new rental property. After 2 years we move into the new property. If we sell at this point, when calculating capital gains, is the value based upon the initial price of the original property or on the new property?

Any other thoughts and ideas welcomed,


Re: S. Florida Dilemma and Questions - Posted by Chris in FL

Posted by Chris in FL on April 17, 2006 at 10:20:38:

John Corey pointed out your options pretty accurately. Lease/option suggestion would only serve to try to improve upon the keeping it and renting it out plan (try to get to break-even or better with higher than market rent, or make it up with a big front-end option fee and hopefully lower repairs expense).
I am in the same position, with less expensive property, though, and have talked to several people in this spot. It really comes down to a personal decision about what makes sense for you (assuming you can sell it without reducing the price drastically).
The financial considerations contain too many unknowns. Tax law could change, real estate market could change, your life circumstances could change, etc. The option I am most likely to follow is to sell, and, if I want the money invested in rentals anyhow, then go buy a bargain (or bargains) with the proceeds that makes sense as buy-and-hold rental property. This gives you lots of options, as you can use the proceeds of the sale any way you want, without tax issues now or later. However, I plan to sell my home soon, and time left to sell won’t be an issue (as it is for you). That means the only motivation for me to keep is because the home I live in is the first bargain (and house) that I ever bought - sentimental value. Good luck with your decision - Best Wishes!

Re: S. Florida Dilemma and Questions - Posted by John Corey

Posted by John Corey on April 16, 2006 at 21:39:07:


If you care to pull out the cash from the property and not pay any taxes on the gains then a sale before you lose the tax exemption is important.

Any solution that continues to have you own the property while not living there moves you close to losing the exemption.

If you do rent the property (as you have done already) and then complete a 1031 you have deferred the gain by moving the tax basis to the new property.

If you wanted to move in you have to move in for 5 out of the last 5 years to use the tax exemption. There is a specific rule concerning the conversion of what was a 1031 tax deferral so that people do not do what you are proposing (at least they will not be able to do it often).

There is the risk that the rules for the tax exemption could change. That is not commonly discussed so maybe not likely. What might be more likely is for the capital gains tax rate to be increased to something higher than 15%. No idea what you tax basis is so no idea if the 15% capital tax rate will apply.

What are you going to do with the money if you sell? There are some significant transaction costs if you sell. They are not recovered.

If you want to own a rental what is wrong with the present home being that rental? You mentioned the negative cash flow. What is the outlook for rental rates? Would this property be something worth keeping given the location? Or it is never going to make a great rental because of the size, location, type or other structural reason?

Best to assume that any 1031 will mean a chain of properties all of which are rentals and which will always be that way. What is the end game and how will you realize the profits or otherwise take out capital over the years?

John Corey

Re: S. Florida Dilemma and Questions - Posted by Jack

Posted by Jack on April 16, 2006 at 19:16:25:

Have you thought of lease optioning it with a hefty option down amount and repairs done by the lessee?