Selling Rental Property, Tax advice?

[James Slaughter]

I own a townhouse that I moved out of in December 2012, and current tenant is purchasing next month.  Since I have not lived there two of the last 5 years, am I correct that I will have to pay capital gains on the difference between what I purchased property for and what I am selling it for?  The property has only been a rental for about 2.5 years, but I don't believe that changes anything.

The difference between what I purchased it for and reselling it for is around 15K (after agent commission).  Not a huge profit but I would obviously like to keep and reinvest as much as possible.  Going to research 1099's since I plan on reinvesting in real estate, but any BP advice greatly appreciated!

[Dave Foster]

@James Slaughter, you can certainly defer the tax on that gain and the associated depreciation recapture by doing a 1031 exchange.  You've probably got a 4k - 7K tax bill depending on a lot of variables but when offset against a $700 - 1000 cost of an exchange you would recognize some savings. There are some specific steps you have to take but with the right guidance and keeping focused you can realize those savings.

One other thing for you to research would be the amount of capital improvements you have made over the course of ownership.  Those will increase your basis and could make a big dent in the 15k of gain.