Question about avoiding Cap Gains when selling a rental

[Ayana Morali]

Hey all, I'm curious to get your thoughts...

I have a rental property on the other side of the country. I bought it 4 years ago and it's been nothing but a pain (I have another rental not far away that's been much easier to manage for various reasons). My current renter is about to end her lease end of June. The market is pretty hot in that area (I got in at a good time) and so I'm thinking I want to sell it.

Here are the numbers: I bought it for $170k (never lived in it, was an investment purchase), have about $115k left on the mortgage. If I do some basic reno's for about $15 (~6 weeks timeline) I can prob sell for around $310k pretty quickly (within a month). So that's about 3-4 months of carrying the mortgage, which I"m in the position to do. I want to buy a place where I currently live (I currently rent here, just moved 6 months ago) but I'm not quite sure I'm ready to buy yet. There are lots of reasons including a bit of job insecurity given COVID, I want to live here a year first to get a better of what neighborhood I want to buy in, in my current price range I might have to downgrade from my rental (I get a realllly good deal atm b/c my landlord stays in the third bedroom twice a year for a couple of weeks), when I buy I want to offset my mortgage with a roommate but am not comfortable doing that in the COVID environment. I also have a feeling that prices are going to drop here come January due to some airbnb laws taking effect then. Anyway, I could go on. The problem I'm trying to solved for: I'm trying to figure out how to avoid paying cap gains taxes on the sale if I don't do a 1031 (though one option is to get an investment property here.)

Are there any other ways around this that you all can think of? Even if it breaks up the money? Like could I put $20k into a 401k and not get taxed on that? Are there several options like this available? You guys are all so smart and thoughtful, I'm curious to hear all of your thoughts. Thanks in advance!

[Natalie Kolodij]

You can't put money into a retirement account and avoid paying tax on it. 

That doesn't work. 

Your capital gains will be calculated as sale price - selling expenses- renovations - (purchase price - accumulated depreciation) 

So if it was rented/depeciated for 4 years bought at 170 and guessing around 80% of your value was building = about $20k of depreciation = so keep in mind about $20k of your gain will be taxed at a slightly higher rate too as depreciation recapture. 

Your gain will be about $310k- expenses - $150k adjusted basis -$15k renos= about $145k

If you have passive losses in the your rentals those can be used to offset the gains generated by the sale. 

You can sell on owner finance to spread the gain out and keep yourself in a lower taxable bracket. 

You can look into a QOZ- may be a good fit because it allows you to get your initial basis back. So your $170k basis in the rental you could get in cash tax free - then you could invest your gains into a QOF to avoid tax on that. 

There are a few options  but most require buying something new. You should talk to your tax professional to plan this out $150k is a lot of gain to not have a very good plan for.