Possible to Split Cap Gains across 2 years?

Question

I've got a multifamily building that is sitting at around $2m in capital gains. Is there a way to sell a property across two tax years instead of one? As an example, sell half in December 2024 and the other half in January 2025?

If so, would this be harder to sell to potential buyers?

Dave Foster · Answer

@Michael Masters, There's actually a couple of ways you could make this work using the 1031 exchange.  If you want to completely defer all tax  then of course you'll need to line up the 1031 and complete it with the purchase of that property you'll then use for investment (with some personal use) prior to moving in and converting it to your primary.

But the other way would be to start a 1031 exchagne in one year in such a way that it's 180 period crosses over into the next year.  You would take an amount of boot from the sale (since you mentioned $2 mil total profit let's work with that) say $1 mil.  That is taxable in the year you sell the property.  The rest goes into your 1031 exchange.  Even if you don't complete the exchange it will end in the next tax year.  And your accountant has the option to treat the 1031 as an installement sale with $1 mil received in the year of sale and the other $1 mil received in the next tax year.

That would accomplish exactly what you asked - to split the gain and tax across two tax years.  The only thing better than that would be the first option and actually complete the 1031 and don't pay any tax at all.

Feel free to reach out if you'd like to process further.

David M. · Answer

@Michael Masters

To answer your question directly, you could do an installment sale where you receive the funds across two tax years...

Just to be sure since many people mess this up:  you figured your profit as your net sales minus your cost basis (basically your purchase price plus your capital improvements), correct?

Also, you will have to pay the depreciation unrecapture the depreciation that's been taking on the multifamily...  There is some more tax liability there for you.

As @Dave Foster pointed out, you could 1031.  Since you mentioned retirement home, you could 1031 part of the funds into your "retirement home," but rent it out for a bit.  Then, move in.  Now that tax liability is deferred in that home.  Of course, there is an issue of where do you live for that period of time to establish that you 1031'ed into another investment property...

I agree with @Michael Plaks, I don't know how you figured that savings...

As for "...harder to sell to potential buyers," the 1031 transaction is mostly transparent to them.  You just need a QI to receive your funds...  Doing an installment sale I THINK could be done just by leaving the funds in a separate escrow account.  I haven't done one of these, so look into the details.

Hope this helps.  Happy to chat.  Good luck.

Michael Plaks · Answer

Your math is off, it's much more complicated then that, but the idea described by @Dave Foster can basically accomplish what you want.

Jonathan Bock · Answer

@Michael Masters

What happened to buy, borrow, and die?   Half serious and Half joking

Michael Masters · Answer

This sounds like the best strategy for me to use, thanks!

If I move half of the sales price to purchase a retirement home, then spread the remaining half across two years, I can reduce the capital gains tax from $452k to $161k on $2.1m of cap gains.  A massive savings of $291k!

Account Closed · Answer

Hey @Michael Masters,

I know this isn't the answer to your question, but do you know what you want to do with the money? It might be easier at that level to sell traditionally and find assets to offset that gain. Additionally, the 1031 exchange is worth mentioning though I'm sure you have already thought of that.

Michael Masters · Answer

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Michael Masters · Answer

Here's a version with some explanations on it, but don't worry about trying to figure this out if it still is unclear.  No matter what, I'll be consulting experts when the time comes.

Thanks all!

David M. · Answer

@Michael Masters I don't know what you are doing honestly...

Note:  please confirm that you are calculating your gain correctly:  Just to be sure since many people mess this up:  you figured your profit as your net sales minus your cost basis (basically your purchase price plus your capital improvements), correct?The left side of your screen shot is moot.  If you have 2.1mil in long term capital gains, and you take it in 2 halves, you'll still be taxed at 20% with today's tax code (good of you to include NIIT).  The total tax is $420k spread over 2 years.  As I said, I've never done an installment sale, so there is probably some additional accounting stuff for how the tax liability is applied across the two years.

Don't forget to also add up your depreciation.  That will get taxed/recovered at up to 25% as well.

Possible to Split Cap Gains across 2 years?

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