2024 selling 2 family Jersey city - 1031 or not? Occupied or vacant?

Question

Hi All,

I have received a lot of help over the years from the BP community on buying/investing and now im looking for advice on selling. I am looking to offload one of my properties a 2 family duplex in Greenville, Jersey City that I got for 5yrs ago. Quick key points and questions below, appreciate any insights, ideas:

- Bought duplex on a VERY up and coming part of Jersey City, right next to Ocean ave, 2018 for 400k. 7bed 2baths, about 3600 sqft w garage and backyard. Bought it renovated, but in 5yrs not so new anymore as tenants lived it down. Area is growing, most houses sold in front of mine, 1M condo conversion just got built/sold on same street. 20mins to NYC Fidi.

- Now looking to sell around 600k (redfin says its worth over 650k, not sure), with 3.3% 30yr fixed loan w 285k loan still, looking for around 315k+ profit. I could wait as it will go up, but rather scale up and live now out of state.

- Both tenants paid 1850/m so there is some CF but not much as tax/expenses slowly crept up, hower new owner could def do over 2k/month rents.

- Added: new roofing for around 15k in 2019-20 and added a 2nd laundry (washer dryer) so each unit has its own.

- Value adds for new buyer: Potential to make front garage usable (current is very narrow), make backyard nicer, finish off basement and make it livable

Questions:

1) From tax purposes, what EXACT tax would be on the 315k capital gains? I am FL resident but its sold in NJ. Any other tax other than capital gains? Im estimating total 15-17% tax so total around 50k if not doing 1031 exchange.

2) With 1031 exchange i know its a million things to know, 45day then 180day rule, 200% rule etc etc but main thing is id be buying out of state condo/land in Miami area and SFH renovatable home in CT stamford area. Dont like the complexity and stress of fidning stuff in 180 days, the potential to get a bad deal sounds worse than having to pay 50k. Happy to be connected to any good qualified intermediary in NJ.

3) I did live in it first year as a primary residence in 2018, but rest 4yrs were all investment property usages on my tax. So probalby doesnt qualify for 2yrs out of 5yrs primary no capital gains tax rule.

4) Want to sell it AS IS (im a licensed realtor so will take the 3%) not sure if any renovations are needed, maybe will touch up wall painting and tidy up backyard/add fence.

5) Should it be sold vacant or occupied? One tenant is moving out March 1, so i could give other one notice now they on month to month, or just have them be there for carrying costs. Thinking of selling March/April to hit spring market.

Any other ideas thanks a lot

Dave Foster · Answer

@Drew Slew, Some good news for you on the 1031 front.

1. Your profit is not $315.  That is your eqity.  Profit is determined by taking your purchase price of that property and adding capital improvements and subtracting depreciation of 4 years.  This is your adjusted cost basis.  Then subtract this basis from your net sales price (contract minus closing costs).  That is your profit.  The depreciation recapture part will be at 25% and the capial gain will probably be 15% fed plus state.  You've still got a significant profit either way.  @Bill Brandt gave you a pretty good guestimation

2. All those pesky little rules about the 1031 - the most important one is to use the QI.  If they're good they'll be your guide.  And they do not have to be located in any particular location.  Most 1031s these days start in one state and end in another anyway.  Most of the QIs like us here on BP all have a national footprint. So performing the 1031 is very easy.  Buying out of state is fine.  Buying any other class of investment real estate is fine.

3. You've rightly identified the main issue - can you make that work within the time constraints?  What we see is that those constraints, while real, are not as big an obstacle as they feel.  We do internal audits on our exchanges.  And even in the toughest time in this market to buy, our clients were still completing successful 1031 exchanges well over 90% of the time.  You do need to be focused.  And you may want to try to get your new property under contract even before your old property sells (it's fine to be under contract before your old property closes).

4. But the biggest thing to remember is that there is no penalty (other than the exchange fee) for starting and not completing an exchange.  If you can't find properties you like then don't turn in a 45 day list.  Your exchange will die on day 46 and you get your proceeds back.  And pay the same tax you would have at the same time you would have.

5. Oh, and one more thing.  You have the option of taking that realtor commission at closing (you'll pay ordinary tax on it).  Or you could not take a commission and leave that in the 1031 exchange where it will be tax deferred.  If you've got losses or a favorable tax situation then take the commission by all means.  But if you've got an income problem (as in too much) you can forgo the commission and save some tax dollars which can then be used to buy more real estate without paying tax on it first.

Bill B. · Answer

What you owe doesn’t affect taxes at all.

To avoid NJ taxes you’d have to do a 1031 to a new property in a tax free state.

So you’d save $40k in federal taxes AND $20k in NJ taxes if you did an exchange to Florida. Maybe buy a 1.2mil duplex on the water and live in half. Or a $800K fourplex.

Drew Slew · Answer

Thanks for all the help and info on this thread, my 2family sold May 29, at asking price 659k. I did move out price as I initially thought psychological 649k would be better, because I realized that with 1 unit vacant (1 tenant paying low $1850/m in first floor unit) i either get homeowners buying or investors who will lowball.

Biggest issue is the tax, its much higher than anticipated 50k as w depreciation recapture is 81k after i paid 5800 transfer tax at closing.. so thats a BIG problem and i want to make sure i pay minimum on that - use 10-20k upgrades i put in prior to selling, max out LLC this year to write all expenses off from it etc.

- Any advice on how to offset that 80k tax? Also my CPA says it needs to be paid by 6/15 which im definitely not doing, way too early. Only paying tax next year April 2025

Learnings that might be valuable to the BP community:

- summary highlight reel of returns https://www.facebook.com/reel/463607949581515 (bought for 395k, 3.75% 30yr fix, took 60k heloc out, cash flowed ok, water bill usually $3-600/m so bad etc) Put on new roof 19k, upgraded w new paint, vanity, boilers 10k prior to selling in April.

- buyer was NACA 0% down, and they will occupy 1st floor unit, got lucky as they fit well into neighborhood and love the house. NACA is VERY slow, they did 2x appraisal and 2x inspection, asked to upgrade a bunch of stuff like random hand rails on 2nd floor stairs etc

- marketing helped with digital floorplans, 3d tour > only held 1 open house and didnt receive that many offers.. surprising. Most investor offers were lowball 500-550k and not professional, some never came to see the place so outright wouldnt consider them.

Overall this area is definitely going to keep going up, but it was time to move on from this investment and find others in CT/FL as more assets as there now. This area Ocean ave/Wilkinson ave around the elementary school in Jersey City will keep going up due to new highrises and condos around it and 20mins proximity to NYC, could well be 850k in the next 3-5yrs.

Julio Gonzalez · Answer

@Drew Slew Here's an article you may also find helpful if you decide to go the 1031 exchange route.

https://www.biggerpockets.com/forums/311/topics/965199-requi...

Dave Foster · Answer

@Drew Slew, yep,  What @Bill Brandt said.  Except in this area duplexes on the water are 1.8...per side!

Drew Slew · Answer

ok great thanks, so the 50k ballpark total tax seems right then, 40-50k

Bill B. · Answer

Drew,

I said $180k gain instead of $200k gain because I assumed selling would cost you $20k, and that’s not taxed.

You DO NOT owe $27k capital gains tax and $13k depreciation recapture (both federal taxes) AND the $40k. That was me adding those 2 numbers together (27+13k = 40k). All you’ll owe on top of that $40k to the feds is however much your state wants.

Drew Slew · Answer

Thanks a lot Bill, very helpful. So your estimate is (purchase price 400k in 2018, selling at 600k 2024) to be around 180k capital gains total and taxes on the 180k (lets say 15% rate so thats 27k), 40k federal capex, 13k depreciation recapture? so around 40+13+27=80k total taxes? seems crazy hight for only 180k profit. I was AT MOST looking at 50k total.

Then a 1031 exchange is def needed. Im trying to guesstimate properly what my actual taxes on the sale would be to see if a 1031 is worth it or just use the cash from sale and invest later/stocks etc.

Thanks

Drew Slew · Answer

Dave, thanks a lot for the comment, will PM you about the 1031 exchange so we can go over details, main concern is time and what it would costs.

As I mentioned, my main goal now is to actually figure out what taxes would be on a potential 600k sale to see if 1031 is worth it. 3% realtor commission is 18k so thats pretty good if it can be added to 1031.

Alecia Loveless · Answer

@Drew Slew If you’re not comfortable with the constraints of the 1031 don’t do it. Or you could start it and then back out. Or do a partial one.

I’d leave one unit vacant and the one unit MtM.

2024 selling 2 family Jersey city - 1031 or not? Occupied or vacant?

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