How to restructure and save ?

[Chad R.]

My wife and I currently have 3 properties between us. Our primary residence and her original home are in NH. We have been renting her place to long term tenants for the last 7 years, she has owned it for 18 years. Our third property is in FL which we use for short term rentals. Her tenants recently moved out and we are looking into potentially selling but struggling with getting an In-depth understanding dollar amount of our Tax liability and depreciation recapture.

We would like to relocate to FL in 3 years and are trying to figure out most cost effective way do this.

We have known about 1031 exchange however are concerned with the 45 day time period and lack of properties to choose from, not to mention the extremely high cost of property at the moment.

Other Info:

Primary residence in NH has equity of $400k +

Rental in NH has equity of $260k+ (Capital gain on $120k?)

Rental in FL has equity of $280k (mortgage of $200k)

We would also like to structure as a business or trust as opposed to reporting everything on our personal income.

We are not opposed moving to her rental in NH for a couple of years, but this is the less preferred option. Eventually when in FL we would like to be set with our primary and 2+ income properties

Looking for direction / possibly someone to work with on how to make this best work for us amd not the tax man.

Thanks in Advance

[Dave Foster]

@Chad R., The problem with converting a rental into a primary is that when you sell you will only get to prorate the tax free gain for the amount of time you actually lived in it.  So if you lived in a property for 2 years but used it for investment for 7, then you would only get 2/7ths of the gain tax free and would still have to recapture deprecaition.  Your most efficient path (dollar wise( is to sell the rentals and 1031 exchange into new investment properties in FL>

Now the caveat to this is if you want to move to a different property in a year or two.  Or if you don't live in FL now.  In that case I'd recommend that one of your 1031 purchases be a really drop dead gorgeous short term rental you wouldn't mind moving into in a year or two.  Do the 1031 and after a couple of years sell the house you live in now (tax free).  And move into one of the rentals in FL (tax deferred because of the 1031).  Converting a property from investment to primary does not trigger the tax.  And as long as you continue to own that property you'll never have to pay the tax.  But you've got tax free dollars in your pocket because of the primary sale.

For her house it's basis is the lower of it's value when she bought it or when it was put into service as a rental.  Take that amount and add capitalized improvements and subtract depreciation.  That is her adjusted cost basis.  Subtract that from the net sales price and voila that's your gain!!!  You reached out to me privately and site has a calculator on it that might help.

Very good plan.  But please stop telling everyone about the Pinellas beaches :). I'm in Redington shores and it's busy enough :)