Strategy to Avoid Capital Gains Tax

[Mikael Winkler]

Hello BP!

I've been kicking around a capital gains question for awhile, hoping to get some insight. To preface, I'm planning to cash out of a duplex I own in my personal name, either through a sale to my partner or on the open market. I haven't 100% determined which of those routes yet. My question is in regard to the capital gain I would realize in either scenario.

Essentially, I am looking to avoid paying capital gains tax, however, I'm not in a position to do a 1031. Unfortunately, I had a flip go sideways for me, and I'm carrying a lot of personal debt right now, incurred from getting that project to the finish line. So, avoiding capital gains tax on the disposition of this duplex would also go a long way in helping relieve some of that debt, as well.

In trying to figure a way to avoid the tax, outside of a 1031, I've been thinking about a particular strategy. It looks like the current long term capital gain tax bracket allows for a 0% rate if a single filer makes less than $40,000 yearly. I don't make much at my W2 job; I really just have it for the W2. I usually do gross less than that. Now, in 2020, when combining my W2 and rental income from that property, I've gone over that $40,000 threshold. So, my thinking is, regardless of how I exit the property, to close in 2021. Without the rental income, and as long as I don't earn more than $40,000 personally next year, I wouldn't have to pay tax on that gain. Is that logic correct?

I also do plan to buy at least one, perhaps two, properties in 2021. Could those be planned so that any rental income is offset by the losses I could claim, effectively keeping my income below that $40,000? Moving forward, I plan to hold those in my LLC actually anyway, so I'd have any rental payments made to that LLC. Perhaps as long as I don't draw any profit from that into my personal name until 2022, that would also be a viable way to shield my personal income and keep it below the 0% capital gains tax threshold.

Does the way I'm thinking through this strategy sound feasible? Any insight is appreciated!

[David M.]

@Mikael Winkler

Let your accountant demystify this.  You've got at least earned income, capital gains, and passive income all in play.  They are separate types of income that are treated differently/separately.

Also, you mentioned a "...flip go sideways for me..."  Well, flips are taxed as ordinary income.  While it depends technically on your circumstances, generally they are ordinary income and not passive income or even capital gains.  That's why flipping isn't really investing and some don't like it since you have to pay tax at your marginal tax rate as well as self employment tax.  I realize you said it was a loss, but you should realize that it is most likely correctly NOT treated as passive or capital gain type income/loss.

Good luck.