What to do with profit from selling a rental property?

Question

Hello, I am in the process of selling a property in Indianapolis, it was purchased as a primary residence but have been renting it out the last five years. I live in Minneapolis and its been a hassle to travel for repairs and things alike. The stars kind of aligned and we are have accepted an offer today, however, we have not been actively looking for property since we have been super busy with life the past month. My question is, lets say we get $15,000 from the sale, we have spent $5000 in the past month or so to fix it up, what is this going to look like come tax time? Should we look for another property, look for something cheap and quick like a condo or bite the bullet in April? And if we do buy another piece of property do we need to use all the money or can we use some to replenish the money we just spent from saving to have the work done? This subject has my head spinning. Thoughts?

Grant Anderson · Answer

If you are going to do a 1031 Exchange talk to someone about it right away. You have to set it put before you sell the property. There are very specific timelines you need to follow so be sure to talk to someone that knows what they are doing.

Kurt Pauley · Answer

I would complete a 1031 exchange and re-invest the money.  If you re-invest the gains into another purchase you can defer the taxes. You have 45 days after the sale to "identify" some property and once you identify a property you have 180 days to make the exchange.   I am currently in the process of doing this with 60k in gains. There a few other rules but PM me if you need more info.

Best,

Kurt

Wayne Brooks · Answer

You'll pay cap gains on the "gain", and recapture taxes on the depreciation for the 5 years.  What you "net" from the sale is not necessarily the same as your "gain"....getting your down pmt back is not taxable, you could have refinanced/cashed out, etc.  A quick talk with a CPA won't be that expensive.

Sam Shueh · Answer

If you talk about 15K-5K=$10K gain that is not enough to worry about after realtor fees.

You gained close to nothing so what are you worrying about.

Sam Shueh · Answer

sell it as 1031 tax free exchange or just cash out. One needs to pay tax eventually or after death.....

John Woodrich · Answer

As mentioned prior, your cash recieved doesn't always mean your gain. If you have depreciated the property you may have income at ordinary tax rates and you may also have  capital gains tax due. There is no knowing how much you owe (or don't owe) until you speak to your tax advisor. You could have taken a lot of depreciation but the passive loss rules or your income may have suspended the losses.

$10,000 isn't worth the hassle of a 1031 exchange but if your gain is a lot larger (say a lot of depreciation was taken) than it may be worth it. Either way you can't do a 1031 on your own.

I am a CPA who invests in real estate.

Michael Lee · Answer

Hello and welcome to BP!  This is a sales pitch that should have put it elsewhere.  Try to control yourself and turn the engine off and use this space for promoting yourself or saying what you need.

Leslie Pappas · Answer

Hi @Cody Burckhardt, if you're an accredited investor and you decide to 1031 exchange, you might consider reinvestment into DSTs. They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. Feel free to connect with me here on BP let me know if I can help. Leslie

Jay Lohn · Answer

I would agree with Kurt and look into a 1031 exchange to keep that money rolling toward your investing goals.

Dave Foster · Answer

@Cody Burckhardt, You could be in for a bad surprise unless you get ahead of this thing.  You do not qualify for any tax free exemption for it being your primary residence because you have not lived in it for 2 out of the previous 5 years.  So you're tax will be figured off the difference between what you paid for it originally and what you sell it for with an adjustment for expenses not already taken during that time.  It should be at capital gains rate but you'll also have MN state gains tax to pay as well.

In addition to this you will have to "recapture" the depreciation you actually took during the 5 year rental period.  If you didn't take depreciation you'll still have to recapture what you didn't take - welcome to the govt.  This will probably be around 5/27ths of the value of the structure apart from the land.  Recapture is at 25% so your tax just from that would be roughly 25% of 20% of the value of the house.

With those two factors present you probably want to dive in and get a better idea of your true gain situation.  A 1031 exchange would allow you to defer all gain and depreciation recapture.  Although you've been busy this month, you will have an additional 45 days from the date of the closing of your sale to identify your potential replacement.  So you do have some time.

What to do with profit from selling a rental property?

Most Popular Reply