Cashing out of rental property - Reduce taxes

[Steve Maye]

In the next year or so I think we will be selling our 2 rental properties and our primary residence to buy our retirement home.   I want to explore ideas on how to reduce my tax burden.

 We want to buy a home with plenty of land.  It dawned on me that I may be able to purchase land as a like-kind exchange for our rental property and somehow subdivide a couple acres to build our primary residence.

Does anyone have any input that can help me?

[Dave Foster]

@Steve Maye, Really good thoughts.  There's several ways here that you could structure this to completely defer all tax on the sales of those properties.

First of all and the easiest.  When you sell your primary now  you will get the first $500K in profit tax free.  So that should be your last move unless... there is more than $500K of profit in that house.  In that case you'll want to explore moving out of it for a year before you want to sell.  Rent it and then sell it.  When you do it this way you can take the full $500K tax free and do a 1031 exchange on the rest to purchase a property that is either adjacent to your retirement home or could become your retirement home after a while, or is a nice vacation investment to give you a break from your retirement home when needed.

Second, the rentals.  You identified one great option and there are a couple more as well

1. Purchase land with the 1031.  This works great.  You'll need to hold it for a year or so before you subdivide and carve out a portion to become your new primary.  This is because you must purchase investment property to complete your 1031.  And if you immediately carve some out to become your primary it looks a little hinky to the IRS.

2. But why not simply purchase two tracts of land - one with the 1031 to be held for investment and one that you don't buy with 1031 dollars that could have your home built on it right now.

3. Or you could actually buy a really nice home and land with the 1031.  Use the home for a while as an investment and then move in see #1 for the need to use it for investment for a short time.  Converting an investment into your primary residence does not create a taxable event.  And the bigger benefit to this one is that simply purchasing land may cause you a depreciation recapture issue.

You've got some really good options and with a little time and strategic thinking you won't have to invite Uncle Sam to your retirement party.