I purchased a small commercial office ($1000/sq ft) in the Trenton, NJ area to run my small business back in August '08. Due to the economy and other reasons, I was forced down to close in early March '09. I am debating if I should sell my property at a loss and move forward. I am hoping you can provide some insight.
I purchased the property at $150,000 and put in $21,000 in improvements. My accountant already reported the $21,000 as a loss in my prior year's tax return. My mortgage is $1,390/mo + taxes ($4,000/yr). Real estate agent charges 7% commissions and the pre-pay penalty for the mortage is 3% of the remaining balance. I put 20% down for the mortgage ($30,000) and the current remaining balance due without penalties is approx. $111,000. All in all, total annual expenses are more than $20,000.
If I were to sell the property at say $140,000, and assuming a tax bracket of 27-30% or so, how much could I potentially pocket after reporting the losses in my 2009 tax return?
Real estate in this area does not appreciate well, so I don't foresee this condo being priced at a value much higher than perhaps $155,000 or so, even in a good economy. According to my calculations since this condo was built back in 1985, the annual appreciation rate has been only 1.5%.
I am hoping you can advise me if it's best to hold and wait and stomach the pain until the commercial real estate market recovers (which most specialists say it will take a long time) or sell it at a loss before the year is over?
Thanks so much in advance!
Alex
Answer In simple terms, if you sell for $140K, less the costs to sell (commissions/costs), and less the loan balance, you might hope to net around $15K (note that you may be able to convince the lender to waive or reduce the prepayment penalty if you present a hardship case to them). Of course, this would actually represent a loss given your higher purchase price. After-tax considerations will help offset the pain, but I usually advise against looking at such elements since tax savings is relatively minor and generally given too much weight when analyzing this sort of thing.
The decision whether to sell or not largely depends on your overall financial situation, the characteristics of the property, etc. Have you considered renting the property to another business? That may be your best option, since your holding costs seem relatively low. Even if you could break even on a rental basis (and receive some of the same tax benefits in doing so), that may be an option to consider.
Otherwise, cutting your losses may make sense, if you're not willing to absorb the negative cash flow, and if you can't make use of the resulting tax "benefits".
