1031 only option?

[Jacob Campbell]

I had intended to sell about $5.3MM of rental property and simply use the profits to may off debt on other notes.  However, I'm told my tax basis will be close to $2MM after depreciation recapture.  

Does anyone have any ideas on how to minimize that tax liability and still continue with my original intent, or is my only option a 1031 (I'm aware of DST but don't see that as a great option).

If so - any thoughts on rolling the profits from residential multi family sale into a commercial office building?   Is office still underperforming or is now seen as a safe investment again?

[Kevin Sobilo]

@Jacob Campbell, a couple thoughts:

Why do you want to pay off this other debt? Is it at a high rate of interest?

If your goal is to hold fewer investment properties of a different type, why not sell MORE properties and 1031 exchange into all new properties. For example, if you wanted to sell property A to pay down the mortgage on property B, instead sell BOTH A & B and 1031 exchange into a new investment property C! 

[Jake Andronico]

@Jacob Campbell

My understanding is you cannot sell your relinquished property and roll over proceeds into a property you own to payoff debt. 

Is this accurate @Dave Foster?

Additionally, the beauty of a 1031 exchange is you do not have to exchange "all or nothing". 

You can 1031 exchange a portion that makes sense for you (office right now is market specific and an opportunity if you know what you're doing), and take the other portion as "BOOT" and pay taxes on that portion. 

Dave can go into this more, he's an awesome resource!

[Bill B.]

You can still sell. If your basis is $2M and you clear $5M after selling costs you’ll owe somewhere between $450k (all capital gains tax) and $750k (all depreciation recapture.). So you’d still have plenty of funds left to pay off debt. 

You can’t use 1031 exchange funds to pay off existing debt so a 1031 doesn’t really solve your problem. You could sell the properties with the problem debt instead? Refinance thsi property to pay off the other properties? 

[Dave Foster]

Correct @Jake Andronico and @Bill B..  But @Jacob Campbell there may be a way to thread the needle.  Instead of doing a full 1031 exchange, use your proceeds and pay off some problem debt as @Bill B. suggested.  Then purchase new real estate with the rest in a 1031 exchange.  You'll only pay tax on that amount.  And will shelter the rest of the gain and depreciation recapture in the 1031 exchange.  

Your reinvestment target will drop by the amount of cash that you take.  So that let's you keep moving forward but strategically remove some of your debt.

If you have several properties to sell then do a deep dive on them.  And simply sell the ones with the greatest equity and highest cost basis.  This will also free up cash with less of a tax burden.