Sell Rental Property & Minimize Capital Gains

Dayton, OH · Member since 2014 · 18 posts · 23 votes

Hi all,

If anyone has any advice or can point me to someone that would be great…

I have a few rental properties and I’m thinking of getting out. That means I have to deal with capital gains. I’ve heard of the following ways to minimize these taxes…

1) Combine some tax harvesting with the sale.

I will be investigating this more but does anyone have any experience with this …any input? …do’s and don’ts?

2) Sell the rentals after living in them for 2 yrs.

Not an option.

3) Do a 1031 exchange.

Not really looking to get another property but I've heard you can exchange into a REIT and I will investigate this more but again …any input? …any do's and don'ts? Note I have zero REIT experience/knowledge.

Thx!

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Mike Smith,

#1 depends on your tax situation

#2 will never get you full tax relief. You'll have to convert them to your primary residence and then live in them for at least two years before you can sell. And then you'll only get to prorate the amount of gain that will be tax free between the years you lived in it and the years it was a rental. If you used one for rental for 3 years and then lived in it for 3 years you would get 50% of the gain tax free. Still this could be a good strategy. But if those rentals aren't as nice as what you'd like to live in you will still need to 1031 into newer nicer investment properties and then convert them into your primary residence.

#3 The 1031 into a passive product like a Delaware Statutory Trust, A NNN commercial building, a larger MF that has onsite management, or a syndication that allows 1031 money would all work well. A REIT can be made to work in a process called a 721 upreit where you end up going from real estate to a reit. the only problem with those is that you are stuck now in a reit which if you ever sell you will have to pay all of the back tax. Once you convert from real estate to a security you have no more option to defer tax again.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Mike Smith,
#1 depends on your tax situation
#2 will never get you full tax relief. You'll have to convert them to your primary residence and then live in them for at least two years before you can sell. And then you'll only get to prorate the amount of gain that will be tax free between the years you lived in it and the years it was a rental. If you used one for rental for 3 years and then lived in it for 3 years you would get 50% of the gain tax free. Still this could be a good strategy. But if those rentals aren't as nice as what you'd like to live in you will still need to 1031 into newer nicer investment properties and then convert them into your primary residence.
#3 The 1031 into a passive product like a Delaware Statutory Trust, A NNN commercial building, a larger MF that has onsite management, or a syndication that allows 1031 money would all work well. A REIT can be made to work in a process called a 721 upreit where you end up going from real estate to a reit. the only problem with those is that you are stuck now in a reit which if you ever sell you will have to pay all of the back tax. Once you convert from real estate to a security you have no more option to defer tax again.
The 1031 Investor5137 Reviews
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Bruce Reeves
Investor · Bella Vista, AR · Member since 2010 · 26 posts · 6 votes
3y
I had a similar question as well. I don't want to 1031 and I looked into the DST. I read you have to be an accredited investor (200k income or net worth 1M+), I'm neither.
So my solution to stomach the cap gain/depr recap is to seller finance. Of course this does not avoid it, just spreads it out depending on how you arrange the financing.
May be an option for you. I feel better having the loan collateral than taking the net proceeds to the stock market and add to my IRA.
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Joe Vesey
Financial Advisor · Member since 2020 · 69 posts · 35 votes
3y
Quote from @Bruce Reeves:

I had a similar question as well. I don't want to 1031 and I looked into the DST. I read you have to be an accredited investor (200k income or net worth 1M+), I'm neither.
So my solution to stomach the cap gain/depr recap is to seller finance. Of course this does not avoid it, just spreads it out depending on how you arrange the financing.
May be an option for you. I feel better having the loan collateral than taking the net proceeds to the stock market and add to my IRA.

Hi Bruce,
There are some other potential solutions if the property that you are selling does not have debt. Glad to have a quick call to see if it may be a fit for you.
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Simon Misiewicz
Member since 2022 · 23 posts · 9 votes
3y
1) Tax Harvesting with the Sale: Tax harvesting involves strategically realizing capital gains and losses to offset each other, reducing your overall tax liability. It can be a valuable technique, but it's essential to work closely with a qualified tax professional to ensure you understand the implications and execute the strategy correctly. They can help you identify which assets to sell to optimize your tax situation and avoid potential pitfalls.

2) Living in the Rentals for 2 Years: Living in the rental properties for at least two years before selling them would qualify you for the home sale exclusion, allowing you to exclude up to $250,000 (or $500,000 for married couples filing jointly) of capital gains from the sale of each property. Since this option is not feasible for you, it may not be applicable in your case.

@Dave Foster for the 1031
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