What are tax implications when selling a rental?

Question

I currently have 1 rental that has $200K+ equity. I'm considering selling and investing in 2 properties but not sure about tax issues and timing. Any advice? I'm thinking of waiting until next year to see where prices are as I believe there will be a dip in the market.

Dave Foster · Answer

@Phaedra Culjak, Very commendable of you to want to help your parents out in that way.  And there's definitely a way to accomplish what you want without incurring taxes on your sale.  On your side you will need to do a 1031 exchange if your accountant verifies that you have a gain like @Basit Siddiqi says.

The 1031 is a specific process that has to be managed by a qualified intermediary.  But you will simply sell your rental and follow the QI and process and then buy your replacement investment property.  It is key that you are selling investment property and buying property for investment.  However it is easy enough to rent the house to your parents as an arms length transaction and then gift them their rent money back at the end of the year.  So you are treating it like an investment.  And they aren't out of pocket.

The second key to the 1031 is that in order to defer all tax you must purchase at least as much as your net sale (contract price minus closing costs).  And you must use all of your proceeds in the purchase.  So I'll make an assumption that your property is worth $400K and has a $200K mortgage (hence the $200K equity).  You would sell that property and do a 1031 exchange to purchase another $400K investment property that you rent to your parents.  That would satisfy the 1031 reinvestment requirements since you're buying as much as you're selling.

If your parents have $200K liquid now they could actually combine that with your proceeds and you could purchase the replacement property with no mortgage (their cash replaces the debt).  But you would have to take title to the entire property since you must purchase at least as much as you sell.

There's a few moving parts but you really have a very positive potential scenario available.

Mark H. Porter · Answer

Do research on 1031 exchanges

Phaedra Culjak · Answer

Thanks so much Dave, your response is greatly appreciated and I'll speak with my accountant to verify the details!

Mark H. Porter · Answer

Bringing in the heat ... look up Dave Foster on this website

Phaedra Culjak · Answer

How to structure an investment to qualify for 1031 Exchange? My elderly parents want to buy a house but prices are much higher in Colorado than when they sold their house in FL. Their house sold for $200K and I have $200K in equity in a rental property that I want to sell. If I take the profit and invest in their home (50/50) so they won't have a mortgage, how can that be structured to quality for 1031 exchange? Any help appreciated!!

Basit Siddiqi · Answer

@Phaedra CuljakWhat did your accountant say when you mentioned to them that you would be selling the home and what the tax consequences are?Ultimately - your accountant is best suited to answering this question.Your gain is sales price less adjusted basis where adjusted basis is purchase price + improvements - depreciation.You may have a gain on the sale, you may have a loss on the sale - only your accountant knows.If you have a gain(depends on how much) and you plan to continue being in real estate, you may want to consider doing a 1031 exchange.

Forest Skufca · Answer

@Phaedra Culjak

You are in a great situation with that amount of equity in your property.

I 100% agree with the recommendations of the 1031 Exchange.

There are great benefits involved, and with lower interest rates in the present market, now is a great time to invest and, more importantly, diversify your portfolio.

I would encourage you to reach out to a team that regularly handles these situations to get their professional advice on what does or does not qualify for a 1031 exchange. You don't want to go into the situation assuming one result and finding another.

Feel free to reach out to me directly as well. I'm happy to help in any way I can!

What are tax implications when selling a rental?

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