Dallas Tax Expert Recommendation & Anyone's Thoughts on Situation

[Zach Hodge]

Hey Guys,

I'm considering selling the duplex I renovated in College Station and I don't know if I need to talk to a Real Estate Accountant or a Real Estate Attorney about my tax considerations. I have an interested buyer (a friend of a friend) and I want to be able to give them a little more info to ensure they are still interested (selling to them is an appealing option for avoiding over $10,000 in realtor fees). Aside from a recommendation on who I should talk to (I am in Dallas now, not College Station) about the tax considerations, I would appreciate the thoughts of any willing experts (or amateurs for that matter) on the forum regarding my situation. Here are the details:

• Duplex purchased in August, 2015 for $155,000ish
• Lived in one side of the duplex until September 2016
• Both sides rented for $1,200/mo ($600/each) when I first bought it
• Both sides now rent for $1,800/mo ($1,000 for renovated side/$800 for other)
• Cash flows well for me (about $8,000/yr) and I have a very reliable, cheap property manager (good buddy of mine); total expenses are around $1,125/mo
• Haven’t added up all the numbers, but estimated renovation costs were about $25,000
• Reasons I am considering selling:
  
  • Live in Dallas - don't want to deal with property out of town
  • Interest Rates rising (slightly afraid of a market dip): my property manager will be leaving College Station in 2 years (once he graduates) and I might have trouble selling the place at that time if market is in bad shape; don't want to pay 12% for a conventional manager to handle it, but I could do that if need be
  • Considering buying and building in Dallas 'M streets' area (for primary residence, not investment) - which will be quite expensive; we have savings, but if we had to pay cash for a distressed home or lot in the area, then that would be tough without this capital
• Looking to sell for about $230,000, which would be about a $50,000 profit:  don’t want to pay taxes on the gains, but I am unsure of how to manage the situation
  • Can’t live in it for another year (to get to 2 of 5 years primary residence)
  • 1031 exchange to personal residence seems tricky – I assume I would have to exchange for another investment property, establish it as such, and then convert it to my personal residence sometime down the road; also the timing on these things seems absurd (45 days/180 days) unless you have something totally lined up, which I guess is the point
  • Am I up the creek and I should just sell it and pay the taxes?
  • I am ok with holding it – it is pretty simple to manage and decently profitable right now, but it might limit our Dallas primary residence options and be more pain down the road

Thanks for weighing in!

Regards,

Zach

[Jim Cummings]

Zach

Options: 

1. 1031: Rollover to new Investment. Clean - straightforward Investment Rollover. Keeps you in the Investment game - just closer to home. The critical issue is IDENTIFYING the Replacement Property(s) within 45 days of Closing. You can identify up to 3 potential properties. Once you have it Contracted, meeting the 180-Day Closing requirement is easy. 

Know WHAT & WHERE before you close on hte CS Property. Meaning - decide on WHAT (type of property - SFR, Duplex, Etc) and WHERE (general neighborhoods) before you put the CS Property on market. Since this is a "friend of a friend" type sale, (maybe the worst of situations - if something goes wrong) possibly you can agree upfront to extend the closing date of the CS property if you run into complications identifying your WHAT & WHERE in Dallas.

FYI: Consider the 45-Day Identification Period an ABSOLUTE date. If you go past that date - you'll pay Uncle Sam - without question!  

2. Pay Taxes: Currently 15%. You'll pay $7,500 Capital Gains Tax on your projected $50,000 Profit. Freedom to go on with life as you desire.

3. 1031 & Convert to Personal Residence: You can later (minimum 1-Year, Desired 2-years - consult Lawyer / CPA), convert to Personal Residence WITHOUT Penalty.