Tax implications of selling a rental property

Tax, SDIRAs & Cost Segregation
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Tax implications of selling a rental property

Mike Finn
Member since 2022 · 47 posts · 17 votes

Hey everyone, new to BP and have lots of questions. Sorry if this question is too broad or basic.

I am trying to understand a basic tax scenario. Let’s say you sell a rental property for a 100k profit (just to make it easy). What would the tax impact be? How does one minimize that tax impact? How long do you have to reinvest that profit into the down payment of another property, or multiple properties?

I have heard people mention that you have anywhere from 90 days to two years to reinvest that profit and avoid a capital gains tax. 

Can anyone out there help me better understand this?

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  • Karl McGarvey
    Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes
    4y

    Google 1031 exchange and learn everything you can about it! Allows you to put off Cap Gains tax for now as long as you go buy another property very soon after you sell the original. You could also sell owner financed if you own the property outright which lowers the punch that the Cap Gains will have at the sale

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y

    @Mike Finn

    Your question is indeed too broad and is the opposite of basic.

    For starters, you're probably using the word "profit" in the investor's meaning, as in cash you receive from closing after paying off your mortgage. This number is completely meaningless for taxes. In its most simplistic definition, profit for tax purposes is the difference between the sales price and the purchase price, minus closing costs. Mortgages do not matter. In addition, you have depreciation recapture taxes which is basically a reversal of your prior years' depreciation deductions.

    The above description is far from accurate and ignores many other tax factors. Even if you were able to estimate the amount of "profit" correctly, you still won't be able to estimate the amount of taxes, because it depends on a lot of factors, too. It depends on your income level, on the past history of this property such as suspended losses if any, it depends on whether you correctly claimed depreciation in the past, it depends on whether you have other investments, it depends on your state which can add state taxes, and so on. 

    As far as mitigating tax impact, read this: https://www.biggerpockets.com/...

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  • Mike Finn
    OP
    Member since 2022 · 47 posts · 17 votes
    4y

    Good to know! Thank you for the quick and detailed response. I will read the link that you sent today. In your experience, are there any ‘back of the napkin’ calculations or ‘rules of thumb’ that you follow or have found useful?

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y

    Hire a qualify 1031 exchange company and save yourself all the headaches and potential losses.

    [email protected]832-776-9582Podcast Guest on Show #469
    NETWORTH BUILDERS5236 Reviews
    WebsiteView Page
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  • Mike Finn
    OP
    Member since 2022 · 47 posts · 17 votes
    4y

    @Wale Lawal Thank you! I just reached out to one. I will try to get a meeting next week!

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  • Mike Finn
    OP
    Member since 2022 · 47 posts · 17 votes
    4y

    @Karl McGarvey Thank you! I will definitely look into that. When you say 'very soon' do you know what sort of time frame that is?

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  • Karl McGarvey
    Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes
    4y
    Quote from @Mike Finn:

    @Karl McGarvey Thank you! I will definitely look into that. When you say 'very soon' do you know what sort of time frame that is?


     45 days to identify a property, 180 days to close on it.

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  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y
    Quote from @Mike Finn:

    @Wale Lawal Thank you! I just reached out to one. I will try to get a meeting next week!


     Great! Goodluck man.

    [email protected]832-776-9582Podcast Guest on Show #469
    NETWORTH BUILDERS5236 Reviews
    WebsiteView Page
    0Reply
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