Selling Investment property

[Michelle Almodovar]

I have gotten tons of information about RE Investing that I am on information overload... there is one question that I am struggling trying to find the answer to.  What happens when we sell?  Looking for a long term investment that will pay me income during retirement.  So I understand that depreciation will decrease my basis on the property so what happens when I go to sell it?  Will I be dealing with huge Capital Gains?  If so, what is the strategy to reduce this impact?

Inquiring minds want to know :)  TYIA

[Dave Foster]

@Michelle Almodovar, the specific answer to your question about depreciation is that the decrease to your basis from the depreciation is part of the calculation of your "adjusted cost basis".  The IRS will tax you on depreciation whether or not you take it as a write off.  And the depreciation portion of your gain is taxed at 25%.  The remainder of your gain will either be taxed at 0%, 15%, or 20% depending on your income level.

@Leslie Pappas, is right, the way to avoid paying tax and depreciation recapture on your investment real estate transactions is through the 1031 exchange. You can use 1031s throughout your investing career to sell and buy and move your portfolio all tax deferred. At the end when you want passive income you can go into a fractional DST ownership like she describes. Or you can arrange your portfolio to be self-managed or other managed. There are also several ways to finally eliminate that tax entirely to you and your heirs. So it is a pretty powerful tool.

@Daria B., "like kind" is defined by use not type. It really means any kind of investment real estate. Investment real estate qualifying for 1031 treatment is real estate that you have purchased for "productive use in business trade or for investment". So you can sell a SFR and 1031 into 2 investment town homes. Or the other way around. Or sell a vacation rental condo and buy a commercial building. Or sell a warehouse and buy several acres of investment land. It all works as long as it's used for investment