All Forum Posts by: Logan Allec

@Michele G. 

Am I calculating this correctly?

Your numbers look good, except your 20% capital gain tax would only be about $79k (20% x the portion of the capital gain not attributable to depreciation recapture).

Are we really facing somewhere around $100k in taxes if we don’t do the 1031?

But yes, all in all, you'd be looking at over $100k in taxes at the federal level alone assuming those values are all correct.  (Don't forget state taxes.)

What type of property (numbers wise) do we need to be considering in order to avoid paying capital gains?

If you want all gain deferred, you must meet two criteria in terms of the property acquired.

The first criteria is that the value of the replacement property (or properties) have to exceed or equal your net sales price, which in your example would be $535k ($575k - $40k).

The second criteria is that you must reinvest all of your net proceeds after mortgage.  I couldn't give you a number here since I'm not sure if your property had a mortgage and if so how much.

Can we buy 2 properties or does it have to be 1?

You can exchange into multiple properties, though there are additional rules if you want to identify more than three as potential replacement properties.

Does that delay all of the tax due (Depr recapture & cap gains)?

Yes, the 1031 exchange has the potential to defer all taxes, both depreciation recapture and the other capital gains.

What happens when we sell the next property?  Do the gains (tax owed) from Prop A keep carrying forward to subsequent properties as long as we follow the rules & invest up?

Yes, if you keep on doing 1031 exchanges, and Congress doesn't kill the provision, you can potentially defer all taxes indefinitely.

How do we make sure we do all of the steps in the right order at the right time? Is that where the intermediary comes in or is that our realtor’s job?

The intermediary will hopefully educate you on the 1031 sequence, but the realtor of course can't be asleep at the wheel when it comes to identifying potential replacement properties and ensuring they close within the appropriate timeframe.

We also have another property with similar numbers. Would it be beneficial for us to consider doing the same with that property?

Sure, if you've already made the business decision to sell it and acquire a new property (this decision should be made first apart from any tax implications).

Is there any tax benefit/downside to holding a rental that is fully depreciated?

Well, you no longer get the depreciation deduction.

Keep in mind that in a 1031 exchange the basis from the relinquished property (or properties), called the "exchanged basis," carries forward to the replacement property (or properties).  It's not like you get to reset depreciation on that piece.

However, if you have additional basis in the replacement property (or properties), called the "excess basis" (say you put more cash into the deal), then that piece would generally get a fresh start depreciation schedule.

@Harsh Patel I just have it in my own name. If you move it to an LLC, you lose the 121 exclusion, which you could otherwise take on the portion of the property you occupied if you live there at least 2 out of 5 years before you sell it.

@James Hill III You only have to live there a year.  I moved out of mine after a year.  :)

@Jon Holdman thanks.

@Andy Bettag Between the two, I'd say it's more important to find a tax preparer in the state where you live, though this is less of a necessity in this day and age.

@Jagadeesh Chandramohan You eventually receive a tax benefit for it because your suspended losses attributable to a particular property are released when that property is sold.

@Harsh Patel Once upon a time I was renting in Tustin and got the idea to house hack a 3- or 4-unit property. I probably didn't expand my search enough geographically (limited myself to properties within a 30-minute commute of the Irvine Business Complex where I worked at the time), but I couldn't find anything that would meet the FHA self-sufficiency rule.

Fast forward to 2015, and I eventually found a 4-unit to house hack using FHA, all the way up in Santa Clarita. It ended up working out.

So I guess the morale of the story is if you're serious about house hacking using FHA, don't get your hopes too high in South OC...you may have to be willing to expand your search radius significantly to find something that would work.

Oh and another thing.  Don't waste time sending direct mail to fourplex owners in LA or OC.  I probably spent about $2,000 on direct mail marketing to 4-unit owners in Southern California, and the few who called back were just fishing for a price.  They all think they're sitting on gold mines (and this was in 2013)...and to be honest many of them are...

Anyway, I eventually just found the Santa Clarita 4-unit on the MLS.

Where direct mail does work in SoCal, however (or at least where it worked for me back in 2015...not sure the market now as I haven't bought anything in SoCal since then), was for older absentee SFR owners in the outskirts of SoCal...I had several people willing to sell me their properties at a deep discount (for cash and a quick close), but I only had the cash to buy one at the time.

@Altaf Essani Either way (LLC or no LLC), sounds like the answer would be "no" based on the nature of the deal.

@Altaf Essani "investors in this investment project"...is this project an LLC or something?

@Altaf Essani You can't 1031 a fix and flip.