Here's my question, and I'm afraid I know the answer . . .

 

Is there any tax advantage (increased depreciation or higher basis) to doing a 1031 exchange on: A condo rental property, originally my primary residence, purchased in 1985 for $103k (original price, purchase cost + capital improvements). Depreciated to $46k over more than 15 years as a rental property. In good condition, leasing it for $1450/month, now worth (who knows in this market?) approx. $240k. Sitting on a (refinanced to get some cash out a few years ago) $96k in principal mortgage. Barely pays to sell given the capital gains, and the incremental effect it has on all our other taxes.

 

With maintenance fees, mortgage interest, property taxes (big in NJ!), and depreciation, I show approx. $4,500 yearly cash flow with approx. $750 in declarable income.

 

Current tenant is terrific, but they move on . . .

 

 

I would love to increase the basis but not pay taxes, but that's not possible is it?

 

Any way to transfer the property to my son at some point (before my death)?

 

Dear D:  As I understand it you have $145K in current equity in your investment property.  On this equity you are earning $4,500 per year.  I calculate that to be a 3.1% rate of return.  That's too little for many investors.  If you take that equity and 1031 exchange into a larger property you could possibly increase your rate of return  on equity.  By buying a larger property you would also increase your basis.  Perhaps better for you would be this strategy:  Have your son pick out the home that he wants to live in.  You 1031 exchange into it as your investment property.  Your son pays rent to you as your tenant.  You hold it for investment for about 2 years or for as long as you need the income.  Then gift it to him.  He would get your basis in the property but if he sold it the first $250K of gain ($500K if married) would be tax excluded under the sale of principal residence tax exclusion.  In this scenario you are combining the benefits of a 1031 exchange now with the benefits of a principal residence sale (IRC section 121) later.  If this doesn't work tell me more. Sincerely, 

Steve Hickox

Attorney / President