Capital gains question

Buying & Selling Real Estate
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Capital gains question

Caleb Webb
Member since 2024 · 2 posts · 0 votes

I have a condo i bought about 8 years ago. I lived in it the first 2 years then had to move for work. I rented it out to a friend and have hardly made any profit after hoa and mortgage. It's worth about $150,000 more than I bought it for. My question is, would I owe the full 20% capital gains tax on that amount?

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    2y

    There are many ways to avoid taxes, so nobody can give you a complete answer without knowing your entire tax situation.

    If your only taxable item was selling this condo, you would owe long-term capital gains on the $150,000 plus ordinary income on depreciation recapture.

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  • Caleb Webb
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    Member since 2024 · 2 posts · 0 votes
    2y
    Quote from @Greg Scott:

    There are many ways to avoid taxes, so nobody can give you a complete answer without knowing your entire tax situation.

    If your only taxable item was selling this condo, you would owe long-term capital gains on the $150,000 plus ordinary income on depreciation recapture.

    I’ve been renting since I moved out. I would be using the equity to purchase a new house for myself and my parents (they’re older now and need help)

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    Your taxable income may be more than $150,000 since you have to factor in depreciation.

    You can potentially consider doing a 1031 exchange.

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  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    2y

    You've lost your primary exemption, it's been too long since you've lived there. You would owe capital gains, but no way for us to tell how much, you need a tax pro. 

    That being said- you have TONS of equity, so you are in a really great spot, that gives you options. 

    First and foremost- why not just get your rents up to market rates? Would that make this a reasonable buy and hold? If this tenant is actually a friend, surely they'll understand your position and either pay the higher rent or find another place so you can get up to market rents. If you don't have the stomach for that, hire an excellent property manager and let them be the bad guy. 

    If you do choose to sell, without knowing much more detail about you or your market, I'd suggest a 1031 exchage in to one or two other units that have numbers that work better for you. 

    Best of luck!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Caleb Webb You're past the point to qualify and exclude any tax using the primary residence exclusion. And would have to pay the gain tax as well as recapture of depreciation on the property. If you decided to sell and purchase another investment property you would be able to do a 1031 exchange, and defer all the tax and the recapture. This would allow you to use the tax and find an area with a greater growth and cash flow potential. 

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