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!