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taxmanrog , Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 450
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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I am having trouble trying to decide whether to take a 1031

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question for taxmanrog, I am having trouble trying to decide whether to take a 1031 exchange or just pay the taxes on the rental property sale I have asked you about before. The property is being sold for let's say 200k and I have a basis of 70k. I have 100 k in capital losses I'm carrying and want to sell a residence which will have a 50k profit above the exclusion . I am wondering whether I would be doing myself a favor if the capital gains taxes are increased again in the future or if leaving the funds in the bank is a great idea.

Submitted: 2 years ago.
Category: Tax
Expert:  taxmanrog replied 2 years ago.
Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

If this were me, I would say sell it without the exchange and pay the tax on it. Right now, we no longer have the lowest capital gains tax in history, but it is still down there. Between the transactions you have listed, you will have $130k gain on the property, $50k on the residence, less $100k in capital losses, for a net gain of $80k. Depending on your tax bracket, you will be paying long term capital gains at either 15% or 20% for 2013. That means you would pay $12k to $16k in tax.

With the present financial situation in Washington, I do not see the capital gains rates falling any more. Rather, I am afraid that they will be going up! Also, if not used, you will use the $100k at $3k per year, so if you used the §1031 transaction, and postponed the gain recognition for 10 years, you would have $30k less in capital losses. This could also be a problem.

That is what I would do.

I hope this helps your decision! Feel free to ask me any other questions you may have.

Thanks again!

Customer: replied 2 years ago.

would you still have the same opinion if the figures where 5 or 10 times these amounts? What would be a safe solution to park the after tax dollars? It could be possible if that if the economy worsened the Cyprus style banking issue could happen here. One of my thoughts is having funds deployed in income property could offer some protection in that sense, which brings me full circle to the 1031 idea.

Expert:  taxmanrog replied 2 years ago.
I see your point. However, if we have a Cyprus style banking issue, or even a Japan style issue, what will happen to real estate? I have heard that even though we are seeing some recovery, the values could still slip by as much as 30%! Here in Chicago, we are still seeing more foreclosures than a year ago at the same time.

I don't have a crystal ball. There are too many balls in the air to guess now. With Obamacare falling apart, or seeming to, the Senate could lose its majority in next fall's election. The House could get a supermajority, so Obama would lose his control. Then what happens? If the Republicans win the majority and pass deficit reduction budgets, which we need, and the President vetoes them, and we hit another fiscal cliff and the government shuts down again, then what happens?

I would still say that a bird in the hand is better than two in the bush. So the decent tax rates today are better than what might happen tomorrow. As far as what to do with the cash, invest globally so that your risk is spread over several areas of the world, then you won't lose as much. Or put it in gold (not my personal favorite but it works).

I wish I could give you a definite answer, but there is just no way to guess!


Customer: replied 2 years ago.

when you say invest globally, what ideas come to mind? Why do you say gold is not your personal favorite? if not what is?

Expert:  taxmanrog replied 2 years ago.

Wen I say invest globally, I meant that you can find both mutual funds (my preferred method) and individual stocks from areas all over the world. You can find mutual funds that invest in Asia-Pacific, Europe, China, South America, Africa, Canada, etc. By investing in these, you can spread your risk of loss over the world's economies. In our recent memory, while the US was in recession, China and Germany were doing well. Now, when the Chinese economy is slowing down, the US economy is starting to pick up. By investing with a global point of view, you can minimize your risks.


I don't like gold because of its limited profit potential. I remember back in the late 1970s, when I started investing. Silver was at $30 per ounce, and gold was at $900 per ounce. Now, 35 years later, Gold topped $1700 last summer, and is now back to $1273, and silver is now at $20. So if you had invested in and held gold, you would have made $373 in 35 years, and with silver you would have lost money. So I am not a big fan of these.


I hope this helps you out!


Thanks again, and have a great week!



taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 450
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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