Can I do a 1031 or is there an other way to avoid capital gain

Tax, SDIRAs & Cost Segregation
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Can I do a 1031 or is there an other way to avoid capital gain

Emmanuel Kizayilawoko
Member since 2019 · 11 posts · 2 votes

Hello friends,

I am looking into selling on of my rental properties, my renter has lived there for about 2 years. By selling I’m looking to profit around $140K before taxes and notary fees etc...

My question is tax related how can I avoid paying tax on the gain so I can invest that money elsewhere. I’d like to look into getting a couple condos with the gains but would like to keep some for other investments. Any ideas is greatly appreciated.

Thank you lots.

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y

@Robert Goldman Not at all.....refinancing does Not change your basis at all and does not affect your gain/taxes.  You aren’t taxed on your “equity” but the difference between your cost to buy/improve and your selling price (less actual selling costs) regardless of financing, all cash, whatever.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Emmanuel Kizayilawoko:

    Hello friends,

    I am looking into selling on of my rental properties, my renter has lived there for about 2 years. By selling I’m looking to profit around $140K before taxes and notary fees etc...

    My question is tax related how can I avoid paying tax on the gain so I can invest that money elsewhere. I’d like to look into getting a couple condos with the gains but would like to keep some for other investments. Any ideas is greatly appreciated.

    Thank you lots.

     If you dont want to do 1031, you can look into the opportunity zones. The Opportunity Zones will help you defer taxes and potentially avoid future appreciation.

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y

    Are you sure the taxable gain will be $140k? 

    Does that account for renovations/ buying costs/ selling costs ect? 

    Were there carryover losses for the time it was a rental that will offset the gain? 

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  • Jay Chang
    Developer · Los Angeles, CA · Member since 2017 · 151 posts · 84 votes
    7y

    You can avoid tax gain by refinancing your property. This way, you can pull some of your capital out and not get taxed. 

    Opportunity zones are great, but most opportunity zone funds take only accredited investors. Also, you will be a passive investor in the fund, so your return might be less relatively.

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    You didn’t by chance live in it for at least 2 years before renting it did you?  If so, you gain may be tax free...IRs section 121.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Emmanuel Kizayilawoko, once you confirm your actual gain you could use the 1031 to accomplish what you want.  You would be looking at a partial exchange.  You sell one property and use the proceeds to buy a couple of replacement properties.  As long the total of the two replacements equals or exceeds your sales price (minus the boot I'll address in a sec) you'll avoid all tax.

    The "boot" is what makes this a partial exchange.  in order to fully defer all tax you must purchase at least as much as you sell.  If you want to take some cash for other things that is fine.  You pay tax on the difference and shelter the rest in the 1031.  So in your case you would take some boot and then purchase two properties that equal at least as much as your sale (minus the boot) and you've fully deferred the rest of the tax.

    That's why @Natalie Kolodij is right on with wanting you to get an exact figure on your gain so you know how much you can take out and still have a benefit from the 1031.

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Jay Chang:

    You can avoid tax gain by refinancing your property. This way, you can pull some of your capital out and not get taxed. 

    Opportunity zones are great, but most opportunity zone funds take only accredited investors. Also, you will be a passive investor in the fund, so your return might be less relatively.

    You can individually buy a property in a QOZ and utilize it that way as well. You do not need to be a passive investor in a QO fund. 

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  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Ashish Acharya I didn’t think about opportunity zones just because the cash maybe tied up for a longer period and the return relatively less?

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  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Natalie Kolodij

    Hi, that includes that doesn’t include the selling costs but does include renovation that were done prior renting it out.

    I’ve claimed depreciation on my taxes for this particular rental as well. So I’m not certain about carry overs.

    After selling in looking at $144,0645.05 gain not including notary fees selling/closing (8%) and tax...

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  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Jay Chang to refinance I would have to keep the property? And since the property is still be financed I would only be able to pull a portion of the equity...?

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  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Wayne Brooks

    Hi @Wayne Brooks prior to renting it I lived in it for 5 years then rented it out for 2 years? Would that still apply?

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Emmanuel Kizayilawoko:

    @Wayne Brooks

    Hi @Wayne Brooks prior to renting it I lived in it for 5 years then rented it out for 2 years? Would that still apply?

    If you occupied and owned it for 24 months of the last 5 years then you qualify for the 121 primary residence exclusion. 

    You'll still pay tax related to recapture- but it should be tax free otherwise. Consult with your tax pro to verify. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    7y

    @Emmanuel Kizayilawoko

    You just hit the jackpot Emmanuel. 

    If you lived in it 2 of the last 5 years and lived in first,  before it was EVER a rental for you, you only owe the depreciation recapture. (If it was rental, then primary then back to rental you owe the taxes.)

    MAKE SURE it’s sold before you’ve been out of it 3 years or you’ll owe all the capital gains. Sell for less if you have to. 

    1Reply
  • Robert Goldman
    Rental Property Investor · Orlando, FL · Member since 2019 · 56 posts · 26 votes
    7y

    You could just refinance it to raise your basis and then sell it after closing to prevent capital gains taxes or if you've lived in it for two years of the past five years, you should be exempt. Check the law though to be sure.

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    @Emmanuel Kizayilawoko Yep, as others have explained...you need to sell it within 3 years of moving out....not 3 years and a day.

    2Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    @Robert Goldman Not at all.....refinancing does Not change your basis at all and does not affect your gain/taxes.  You aren’t taxed on your “equity” but the difference between your cost to buy/improve and your selling price (less actual selling costs) regardless of financing, all cash, whatever.

    4Reply
  • Robert Goldman
    Rental Property Investor · Orlando, FL · Member since 2019 · 56 posts · 26 votes
    7y
    Originally posted by @Wayne Brooks:

    @Robert Goldman Not at all.....refinancing does Not change your basis at all and does not affect your gain/taxes.  You aren’t taxed on your “equity” but the difference between your cost to buy/improve and your selling price (less actual selling costs) regardless of financing, all cash, whatever.

     I'll look more into it but I have read multiple places that refinancing raises the basis because of the increase in debt. 

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    @Robert Goldman You’ve read bad info..

    3Reply
  • Syed H.
    Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    7y
    Originally posted by @Robert Goldman:
    Originally posted by @Wayne Brooks:

    @Robert Goldman Not at all.....refinancing does Not change your basis at all and does not affect your gain/taxes.  You aren’t taxed on your “equity” but the difference between your cost to buy/improve and your selling price (less actual selling costs) regardless of financing, all cash, whatever.

     I'll look more into it but I have read multiple places that refinancing raises the basis because of the increase in debt. 

     Yeah that’s wrong. 

    1Reply
  • Syed H.
    Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    7y
    Originally posted by @Natalie Kolodij:
    Originally posted by @Jay Chang:

    You can avoid tax gain by refinancing your property. This way, you can pull some of your capital out and not get taxed. 

    Opportunity zones are great, but most opportunity zone funds take only accredited investors. Also, you will be a passive investor in the fund, so your return might be less relatively.

    You can individually buy a property in a QOZ and utilize it that way as well. You do not need to be a passive investor in a QO fund. 

     Do you have a link to this? From what I had read before, you need to do a fund or essentially set up a fund.

    Also you can’t just simply buy cash flowing RE in an OZ. You need to redevelop and put a bunch of money into it. 

    1Reply
  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Bill Brandt that’s what I thought but my CPA didn’t seem to think so.

    0Reply
  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Bill Brandt but sounds like that may just work out thank you for your answers

    0Reply
  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Wayne Brooks now I get it thank you.

    0Reply
  • Emmanuel Kizayilawoko
    OP
    Member since 2019 · 11 posts · 2 votes
    7y

    @Emmanuel Kizayilawoko

    Thank you so much you guys

    0Reply
  • Jay Chang
    Developer · Los Angeles, CA · Member since 2017 · 151 posts · 84 votes
    7y
    Originally posted by @Emmanuel Kizayilawoko:

    @Jay Chang to refinance I would have to keep the property? And since the property is still be financed I would only be able to pull a portion of the equity...?

    That's right, you will have to keep the property if it's refinanced. Depending on your LTV, you will most likely need to keep 25% of the value in equity.

    0Reply
  • Zachary Bohn
    Accountant · Englewood, OH · Member since 2019 · 87 posts · 43 votes
    7y

    @Robert Goldman If you refinance then you also have to trace the funds. So interest on the original balance of the loan will still be deductible, but the deductibility of the interest will for the cash taken out will depend on the used of the funds. As others have said refinancing does not effect basis at all

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