All Forum Posts by: Leland Dunn

Hello BP members! My wife and I are trying to wrap our heads around the new tax plan before we dive into 2019. We own a rental property that went through a 1031 exchange in 2016. If we were to sell this property in 2019 we are under the impression that you will not owe capital gains on the profit if your taxable ordinary income is less than $77,200....?

With the new tax law going in effect in 2018 it seems nobody knows the specifics of how all this will play out, including the IRS. I did find an article that states:

You qualify for an income tax deduction equal to 20% of your rental income if:

• you operate your rental business as a sole proprietor, LLC owner, partner in a partnership, or S corporation shareholder, and
• your total taxable income for the year from all sources after deductions is below $315,000 if you’re married filing jointly, or $157,500 if you’re single.

We own 3 rental properties, all single family homes with the titles in our names. We do not have an LLC, just rent the property with landlord insurance and an umbrella policy. Does this make us the sole proprietor? We are trying to distinguish if we need to start an LLC to benefit with the new laws. Thanks for all your help on this forum.

Leland

This has been a long painful journey to find a concrete answer and last week I made the mistake of calling the IRS for help. After waiting for 2 hours the first call (they hung up on me without speaking) and another hour on hold a second call I finally spoke to a person regarding capital gains and selling real estate. The lady who answered on the IRS side only gave me 2 sentences and I mentioned the word 'rental' property... she said 'STOP RIGHT THERE. NO. NO. IT'S A RENTAL PROPERTY SO OF COURSE YOU PAY CAPITAL GAINS. END OF STORY'. I was baffled, she had NO idea what she was talking about. When I tried to educate her of the 121 exclusion (2 out of 5 years as primary) she said that wasn't true, and may only be true if you rented a room out and not the whole house. I was so angry I couldn't speak to her any longer... so back to my own research I went. The GOOD NEWS I have talked to multiple CPA's and real estate investors to be 99% sure that we can sell both houses in the same year and not be responsible for capital gains tax. 

I wanted to provide an update and closure to the thread. Oh, and I also came across this thread in BP with the exact same scenario:

https://www.biggerpockets.com/forums/51/topics/349...

I can't believe how difficult this was to get a concrete answer on. And the IRS didn't help AT ALL! How are we supposed to follow the rules??? Thanks for listening.

And thank you all for your input, I might have never proceeded with finding the true answer without everyone's optimistic views on this thread. It's going to be a great year for us!

Leland

I really appreciate the example above Steven Hamilton II as it fits our situation. However, after further review of the IRS publication 523 I noticed the text in bold below and it clearly states one spouse cannot use the exclusion if the other has in the previous 2 years. Bummed, my CPA looks to be correct.

So my CPA told us that even if we file separately we can only utilize the use and ownership exemption once every 2 years. Which doesn't seem right to me because that means if we weren't married we could separately use the exclusion and not pay any taxes on 250k per house profit... but since we are married we can only sell one house instead of 2. I think I am going to reach out to another CPA, unless there is a tax forum website someone knows I can reach out to other experts??

I did read you can only use it once every 2 years, but wasn't sure if filing separately would change that. I will talk to my CPA and let everyone know the outcome on this post. Thanks for all your input!

We meet with our CPA next month so I will ask her for sure. I found one website that states: "However, you can take advantage of this exclusion only once every two years.".

I'm guessing they are just talking about a single filing tax payer and since we can still sell 2 house sells in the same year without capital gains tax <500k with our circumstance?

Hello BP community, My wife and I own 4 rental properties in Denver, 3 of them single family homes and one is a duplex. This year we are planning to sell one single family home and possibly another if capital gains don't interfere. 

House #1: My primary house 2010-2015.

House #2: Wife's primary house 2010-2014

We got married 2014, she moved in to house #1 with me for 6 months before we bought another house which we moved into 2015. 

So both houses we are looking to sell were our individual primary residency for at least 2 of last 5 years. Neither house has both of our names on the title since we both bought them when we were single. So if we sell both houses this year and file taxes jointly then we should be able to profit up to $500k right? And to find the Capital Gain do we simply take the sell price minus the buy price? I've also read you can deduct home improvements and realtor commissions (is that sale commission only?). 

Thanks for your help figuring this out. Seems every website I read about this stuff says something different... ugh taxes.

well that answers that, thank you. 

We are in the process of a 1031 exchange. Sold an investment property for $285 (140k profit), buying another for $245k (pay capital gains on the 'boot).

My Question is, can we hold this rental for a year then sell it for say $260k and only pay the capital gains on the profit from this new house? There's no way we would pay the capital gains on the current purchase (capital gains on over 100k would hurt). But since we are buying this house, hold it for a year plus, then sell it the capital gains will not be bad at all (say 10-20k, or maybe 0).

Thanks Community