Taxes owed on sale of a 1031 property in less than a year

[Kyle Stanley]

Question for the 1031 QI’s and the CPA’s.

We bought a STR in the Smokies in September 2022 using 1031 proceeds from sale of a LTR we owned for 2 years. It is draining me and we need to get rid of it. Our intent was definitely to hold as we've had in on AirBNB and VRBO but we financially can't any longer as all our reserves are gone and having to pull from personal funds at this point. We just need to cut losses and move on. The replacement property has not gained any value if anything maybe lost a a couple grand in value so should be a wash with no gain on this from a cost basis. What do you folks think we would walk away with approximately after everything?

Net proceeds from sale of LTR $75,000

[Bill B.]

If the second property is a wash then the taxable gain would be exactly the same as if you hadn’t exchanged the first property. All those taxes were deferred, not forgiven. 

HOPEFULLY, you haven’t turned all those gains in to short term taxable gains if you sell within a year and almost doubled the taxes due. That’s a question for your CPA. 

TLDR: best case is your deferred gain from sale 1 x 15% plus about 3.6% times the property without land value times years held (depreciation recapture) times 25% tax rate. You’re hoping you didn’t/don’t turn that 15% in to your marginal rate by selling in less than a year. That’s a question for the experts. 

Ps. If you don’t live in a tax advantaged state don’t forget to add your state and/or the property’s state tax on top of that.