Real Estate Broker: Time to Sell

What do real estate industry insiders really think about the current Sacramento housing market? This Q&A in the Sacramento Bee sheds some light:

Q: I'm 59 years old and own a property management company. I'm not looking to retire for another eight to 10 years. I own a duplex (two cottages on one parcel) that was purchased in 1993 for $170,000. It's now worth approximately $485,000.

My tax accountant, who also owns a real estate brokerage firm, is advising me to sell the duplex now and stockpile the cash (estimated at about $170,000 after having to pay $118,000 in capital gains taxes). His rationale is that cash will be king when the real estate market goes down, as it always does, and foreclosed properties will be purchased as a deal for those who have cash.

Is paying $118,000 in capital gains taxes worth it to get cash now?

- Linda, Sacramento

A: You are in the property management business but expect me to know what's going to happen to real estate values over the next few years?

Asset prices move by the psychology of the people making up the market as anything else. After all, your duplex has more than doubled in value over the past five years, not because rents have doubled, but because people were willing to pay more today than they used to. Why? This is a good question for any real estate investor to ponder.

Is there a chance real estate prices will fall? Sure. Price declines in the near future might be more likely than price increases. Only time will tell.

There are clearly times when it makes sense to sell an investment, pay the taxes and move on. This may be one of those times for you. You should never let tax consequences dictate your investments. I recall all too vividly those in the late '90s who wouldn't sell their stock because they didn't want to pay capital gains. In retrospect, a capital gain would have been much better than a capital loss.

If you sell your rental, you need to remember that you may be wrong and prices might continue to climb, or at least not fall. If that is the case, you need to be in a position to deal with that financially.