Disposing 1031 Exchange Property Question

[Jonathan Paz]

Hello, I am trying to get an idea for the tax consequences I would face by selling a property that I acquired via 1031 exchange.  Here is the background:

*I purchased Property A on Feb 2016 for $109K with cash, rented out, Sold 2 years later (Apr 2018) for $141K after closing costs.  So my long-term capital gain was about $32K.  I depreciated about $7K from the property over the 2 years.

*Proceeds after paying off a HELOC were $65K.

*I decided to do a 1031 exchange, and needed to fully invest the $65K, so I acquired 2 duplexes and split the $65K proceeds evenly for down payments between the 2 duplexes.  Duplex B was purchased for $170K and Duplex C was purchased for $157,500 (About $165K all-in after closing costs).  I closed on both properties in May 2018.

*I have received a strong off-market offer to buy Duplex C for $189K, where I may net about $185K after closing costs.  I really don't like Duplex C very much, and okay with selling it as long as I don't have a big tax loss/overall loss due to the 1031 exchange.  Plan would be sell early Jan 2019. 

So my question is, about how much would I owe in taxes if I were to sell Duplex C? 

I'm hoping that my tax due to IRS will be about 50% lower than if I were to have not split the proceeds evenly between 2 properties.  So, I had a $32K capital gain from Property A, along with about $7K in depreciation recapture, so if about 50% of it is owed back to IRS, it would look like this:

- Long-Term Capital Gains: $32K/2 = $16K long term capital gains at 15% = $1,600 due to IRS. 

- Depreciation Recapture: $7K/2 = $3,500 at about 25% = $875 due to IRS.

--- Total due to IRS will be about $2,500.  This would definitely make it worthwhile to sell, because I was all-in for Duplex C for $165K, can perhaps sell for $185K after closing costs, and that would put me at $20K profit (which will be taxed, short-term ordinary income bracket).  I then only owe about $2,500 in back taxes from 1031 exchange.  Overall I would have a profit, correct?

If I am in the ballpark in my calculations here, it sounds like it would make a lot of sense for me to sell

[Wayne Brooks]

@Dave Foster can help on the division of deferred gains.  I would guess it would be pro data based on the replacement property cost for each, but I’m throwing darts.

BTW, your 15% calculation on $16k cap gains would be $2400, not $1600....small brain fart I know.