1031- capital gains

[Brandy Anderson]

I can't say enough times how much I LOVE Bigger Pockets and the fact that I have a place I can come to and ask these questions without having to weed through articles on google from potentially unreliable sources. I need help, my friends. I am selling my house in Nashville, TN very soon (hopefully! the market is HOT there so fingers crossed) and will be purchasing a property here in Portland, OR in a 1031 exchange to avoid capital gains taxes. I am wondering, if I kept some of the proceeds out to help pay for my dad's medical bills, would I pay taxes on the entire net amount from the sale, or simply the amount I keep? And at what rate am I taxed? Thank you to anyone and everyone who is willing to share your knowledge with me!

[Bill Exeter]

Originally posted by @Brandy Anderson:

I can't say enough times how much I LOVE Bigger Pockets and the fact that I have a place I can come to and ask these questions without having to weed through articles on google from potentially unreliable sources. I need help, my friends. I am selling my house in Nashville, TN very soon (hopefully! the market is HOT there so fingers crossed) and will be purchasing a property here in Portland, OR in a 1031 exchange to avoid capital gains taxes. I am wondering, if I kept some of the proceeds out to help pay for my dad's medical bills, would I pay taxes on the entire net amount from the sale, or simply the amount I keep? And at what rate am I taxed? Thank you to anyone and everyone who is willing to share your knowledge with me!

Hi Brandy,

First, if the house that you are selling is your primary residence it will not qualify for 1031 Exchange treatment.  It would qualify under Section 121 of the Internal Revenue Code (i.e., the 121 Exclusion) as long as you can say that you have lived in the house as your primary residence for at least 24 months out of the last 60 months.  You can exclude up to $250,000 in capital gains from your taxable income if you are single or up to $500,000 if you are married under the 121 Exclusion.  This means that the first $250,000 or $500,000 in gain/profit is tax free.

Second, if the house is a rental or investment property, you can structure a 1031 Exchange to defer the payment of your tax consequences.  You would only pay tax on the amount that you did not reinvest, so if you pull some cash out to pay your dad's medical bills you would only pay tax on the amount that you pulled out.