Buy and sell in 6 months, what about taxes?

Question

Ok, this is what we got...

My mom bought a condo (140k) 6 months ago with the idea of renting it and have a passive income, long strory short the HOA didn't allow her to rent it, just for her (or family) to live in, so now she is thinking about selling it again (she doesn't live in the US).

She got a very good offer (170k) but I think that the market in that area is still growing because of the urban developments there (shopping mall, convention center, etc).

On the other hand the apt is empty and it's costing her around $400 in HOA fees.

What would you do? Do you sell it or hold it for a while?

Thanks!

Bill Exeter · Answer

Hi Claudia,

The non-citizen requirement that was mentioned above is the FIRPTA withholding requirement.  FIRPTA requires escrow officers, closing attorneys or other settlement processors to withhold and remit to the IRS 10% of the gross sale price unless the IRS issues a Withholding Certificate of Exemption to the closing agent.  The FIRPTA withholding requirements have changed recently, and the process can cause delays and/or problems with the sale of U.S. property when a foreign person is involved, especial when  a 1031 Exchange is part of the mix.

Dave Foster · Answer

@Claudia Bonaudo, Your Mom's intent seems to be pretty clear - she was not trying to flip the condo.  She wanted to keep it as a rental but the HOA restrictions are now going to prevent that.  So she is probably good doing a 1031 exchange.

But there's one more thing that you may need to be careful of.  You indicated that your Mom does not live in the US. Mexico I'm thinking from your profile?   If she is not a US citizen then there are some other very stringent rules regarding non-US citizens and doing 1031 exchanges.  Non-US citizens can do 1031 exchanges but you'll want to make sure the parameters are followed.

Bill Exeter · Answer

Hi @Claudia Bonaudo

She bought it with the intent to hold for rental purposes, so she would qualify for a 1031 Exchange (tax-deferred exchange) IF she wants to reinvest into other rental/investment property.  She can defer the payment of her capital gain taxes as long as she buyer one or more replacement properties that are also held for rental or investment purposes.

Some will tell you that your mom has not held the property long enough, but the only requirement is that you have the intent to hold for rental purposes.  It sounds like you can demonstrate that she did have the intent to hold for rental/investment purposes but that the CC&R and/or HOA rules do not permit the rental of the unit, which you can easily prove to an auditor.

Steve Vaughan · Answer

Hi @Claudia Bonaudo.  While taxes are certainly a consideration when I'm doing a cost/benefit on a potential sale, it wouldn't be my primary driver.

Any s/t gain would be considered ordinary income.  She has been offered a gift, IMO.  Didn't do enough DD to find out whether rentals are allowed?  Most would lose money after a 6 month condo oops.  A lot of money.

Sell, but always flinch at the first offer.  I would tell them they 'have to do better than that' then take their next number and count my blessings.   I would not sit with a vacant property paying holding costs in the hopes it rises even more.

If I owned free and clear and wanted cash-flow, I may consider carrying the financing at an even higher price.  Good luck!

Claudia Bonaudo · Answer

Oh and by the way of someone knows what happen with taxes, I'll appreciate that advise as well.

I guess sometime I heard about reinvesting in Real Estate so you don't have to pay a lot...

Claudia Bonaudo · Answer

Thank y'all guys! @Steve Vaughan, Tom T.

You did help me!

Claudia Bonaudo · Answer

That's good to know @Bill Exeter, now I know what's the name of the thing we where thinking about (1031 Exchange (tax-deferred exchange)).

Thank you so much @Dave Foster for the non-citizen info and you are right she's not so we have to check it with an attorney or a CPA.

Ned Carey · Answer

She Might be able to do a 1031 exchange so that any profit is just moved into the basis of the new property.  There are many rules that apply to these, and it may not qualify with such a short holding period. however since she bought it with the clear intent of renting it may qualify.

Otherwise it is a short term capital gain which is taxed at ordinary tax rates.

Find an expert in the field if you want to go that way. The are several 1031 exchange experts here on BP.

Andrew Syrios · Answer

Holding it is really just waiting for appreciation and I think that qualifies as speculation and not investment. If she can't rent it out, I would sell it (especially since she can do it for a profit) and move on to the next thing.

Tom T. · Answer

I'd suggest selling. Maybe try and bump them up a tic but sell. Take the money. Pay the tax. (I am not a tax accountant, this is only an observation. Please consult an accountant)Selling now, I think your gain would be taxed at your personal income level.You would have to carry it for at least 6 months to get to a year and a day to have any shot at reducing taxes. (Goes to Long Term capital gains rate which I think is 15%) I think your tax now would be calculated by taking your net selling price less your payment price and adding any capital improvements (which I didn't see any of those).It should be taxed at the owners, sellers income rate. A 1031 exchange (selling this property and getting another of higher value but similar. IE: another condo.. is another strategy but unless you want to get deep into the investing world.  I again suggest you guys take your profit and enjoy it. That is what I would do if I were you.

Luck is what happens when preparedness meets opportunity.Make it a great day!

Buy and sell in 6 months, what about taxes?

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