Selling a Rental Property within year! Tax Consequences, etc.

[Ryan Hutchins]

Hey Everyone!

My partners and I built a rental property for $350,000 and have an opportunity to sell it for close to $750,000+ based on comps in the surrounding area for the last month. Construction started in February of 2021 and we took over as the owner of the property in November 2021. As such, if we sold the property, we would be taxed at ordinary income rates, which for two of the partners, is 40.0%. After paying off debt, our return on capital injections exceeds 100.0%. 

In order to avoid the 40.0% ordinary income tax, we would have to wait until November to close on the transaction to recognize a 25.0% long-term capital gain tax. Is there any way around waiting until November to transact and still recognize a 25.0% tax rate? If yes, how? 

Thanks!!!

[Michael Baum]

If you are planning to buy another property, you could do a 1031 exchange into another property. Avoid the taxes right now all together. It just kicks it down the road.

You could also invest in a QOZ fund. That would lower the taxable amount by 10% + and push it down the road a bit as well.

https://www.robertprussocpa.co...

I am not a CPA or anything, but I would contact one or a tax lawyer to see what else can be done.

[John Underwood]

Quote from @Michael Baum:

If you are planning to buy another property, you could do a 1031 exchange into another property. Avoid the taxes right now all together. It just kicks it down the road.

You could also invest in a QOZ fund. That would lower the taxable amount by 10% + and push it down the road a bit as well.

https://www.robertprussocpa.co...

I am not a CPA or anything, but I would contact one or a tax lawyer to see what else can be done.

 Lease it to buyer then close in November. 

[Thomas Huberton]

Two good suggestions here.  At that level of gains I personally would go the 1031 route and roll it into a multi-family property.  

[Ryan Hutchins]

Thanks for your response! I just added an update to the post: 

I forgot this important detail. The majority partner wants to take the proceeds and look at a capital contribution to way off the debt of another unit that is two doors down from the unit being sold.

So a 1031 exchange would not be possible for the capital contribution aspect.

I wish we could do either of those options because that is where my mind went too.

[Ryan Hutchins]

Quote from @Thomas Huberton:

Two good suggestions here.  At that level of gains I personally would go the 1031 route and roll it into a multi-family property.  

Thanks!! Great idea! I wish I could do so, but I noticed that I had forgot one key detail to this weird transaction:

I forgot this important detail. The majority partner wants to take the proceeds and look at a capital contribution to way off the debt of another unit that is two doors down from the unit being sold.

So a 1031 exchange would not be possible for the capital contribution aspect.

[Ryan Hutchins]

Quote from @John Underwood:

Quote from @Michael Baum:

If you are planning to buy another property, you could do a 1031 exchange into another property. Avoid the taxes right now all together. It just kicks it down the road.

You could also invest in a QOZ fund. That would lower the taxable amount by 10% + and push it down the road a bit as well.

https://www.robertprussocpa.co...

I am not a CPA or anything, but I would contact one or a tax lawyer to see what else can be done.

 Lease it to buyer then close in November. 

 Hey John! Thanks! Would a potential buyer being willing to do so with the uncertainty in interest rate increases by the time November comes around to close?

[Carlos Ptriawan]

I did exactly like what you did but since we have multiple rentals and K1, the PAL from other rental can offset some of the gains. Also since it's flipping it's treated as a trade and you could utilize QBI deduction.The key is you need to make gains after all.

Next time BRRR I would sell less than a year again.

[Ryan Hutchins]

Quote from @Carlos Ptriawan:

I did exactly like what you did but since we have multiple rentals and K1, the PAL from other rental can offset some of the gains. Also since it's flipping it's treated as a trade and you could utilize QBI deduction.The key is you need to make gains after all.

Next time BRRR I would sell less than a year again.

[Ryan Hutchins]

Quote from @Carlos Ptriawan:

I did exactly like what you did but since we have multiple rentals and K1, the PAL from other rental can offset some of the gains. Also since it's flipping it's treated as a trade and you could utilize QBI deduction.The key is you need to make gains after all.

Next time BRRR I would sell less than a year again.

 Thanks!!