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Jan 10 2011 12:00AM

Question


I have an investment property that lost $50,000 in value and is costing me $10,000 per year to maintain. This is obviously a big loss. What are my options to compensate for this loss?

Answer


“Often, questions of this sort create more questions than answers,” said FPA member Shaun Eddy, CFP®, of Strategic Wealth Management. For instance, he asked: “Do you have any debt on this property? If you owe more on this property than it is worth that can definitely be a challenge. Is this property anything you wanted to own long-term or was it purely an investment property? I generally have clients look at the current value of their property and try to look at the price that the property could currently be sold for. This is a tough market to sell anything in. After you have determined the sale price, then you can look at your holding costs and decide if it is worth lowering the sale price any further as the longer you own the property the more holding costs you will have. It’s hard to look at lower prices, but when you realize you are losing money just by holding something the math begins to make a little more sense. How long has this property been owned? Is this a short- or long-term capital loss? Next I would ask if you have any capital gains in your investment portfolio or elsewhere that you might want to offset by your real estate losses. It’s best to confirm all the details with your accountant, but this might be a way to turn a loss into a bit more of an advantage even though it’s still no fun. Make sure you have all your questions answered before you make any decisions.”

Another planner also had more questions than answers. FPA member John Austin, CFP®, of Austin Wealth Management, asked the following: “Is your $10,000 loss before or after depreciation (a non-cash charge)? Is there equity in the property? Is there a loan? Can it be refinanced? Do you have income with which to offset the loss? Is the property fully occupied? Can the rent be raised or the expenses cut? Have you considered a 1031 exchange for another type of higher yielding real estate? Have you consulted with a realtor? Could you find a partner to add capital and reduce debt? Can you move into it — this creates other opportunities. Location is important to determine if it is likely to appreciate.”

Of note, Austin also suggested that assessments do not usually reflect fair market value. “You might want to get an informal appraisal of value before assuming that you are down $50,000,” he said. “Also, it’s important to consider your true net loss. If the property has a depreciable value of $275,000 depreciated over 27.5 years you have a non-cash loss of $10,000 per year which you can apply to your other income, which in the 28 percent federal bracket saves you $2,800 in taxes, thereby reducing your net loss to $2,720. If you could raise rent or reduce expenses by $226 per month, you would be at breakeven (net of depreciation tax savings) cash flow. Time will heal the other wounds.”

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