Getting bought out of an investment, anyway to avoid taxes?

[Blake Shultz]

Hey BP!

This is officially my first Forum post that is not a response to one of y'alls questions! Any advise is appreciated, thanks!

One of my very first investments was partnering with a seasoned investor/realtor friend who let me tag along and learn from him in a purchase/remodel. The property is a quadplex in an appreciating area of Birmingham Al. I put in a few thousand upfront and with a back ground in construction, put in a lot of time in helping remodel the units. I am not on the loan or the deed, but had more of a "silent investor" role in the deal. (I have since learned to get anything and everything in writing even if it is with good friends!)

All of this initial work was in 2014. We got 3 of the 4  units remodeled and rented, and kept the 4th unit occupied with the low income (on time, easy to deal with) tenant. At the time, we did not have the funds to remodel the 4th. My partner now wants to refinance and remodel the 4th unit. This property has been a great cash flow deal, but over the past few years I have branched out and started investing on my own. 

I am now looking at getting bought out of this deal with money coming from the refinance (which we have both agreed is mutually beneficial) but I am having trouble with how to legally avoid all the taxes on the significant gains I will get in doing this. 

I understand a 1031 exchange does not apply here for multiple reasons. Is there any tax loop that is similar for this situation that  I could roll these gains into other property? I have identified a few properties and also have some under contract that I could roll this $ into if possible.

Thanks again for the help!    

- Blake

[Brian Schmelzlen]

If you are just looking at this property in a vacuum, then no there is not a way to avoid taxes on this sale.  However, keep in mind that you will be taxed at capital gains rates which are either 0, 15, or 20% (federal only, not including state) based upon your income.

So my question is are there things you can do outside of this sale to decrease your overall income for the year so that you are taxed, but taxed at a 0% rate for federal income tax purposes?

For example, lets say that another one of your investments is commercial property that needs a lot of money invested into it (repairs, etc.).  You could put your money into that, and then have a cost segregation study done.  Hopefully (talk to your CPA and/or a cost seg specialist first) enough of the rehab work will qualify as 5-15 class-life property.  If that is the case, under the new tax law you can take a 100% bonus depreciation on it which means that it would be entirely deductible this year bringing down your taxable income significantly.