Sell Rental Property & Minimize Capital Gains

[Mike Smith]

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!

[Dave Foster]

@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.