All Forum Posts by: Sean Ross

@Gerald Maczuga,

The Long Term Capital Gains rates for 2024 include a 0% bracket for "married filing jointly" that caps off at $94,050.  

However, that is for total taxable income.  If all of your joint income for 2024 is less than $94,050 -- including the entire profit from selling the two rental properties -- then you will not pay any capital gains on sale.   

Since you said the total capital gains is $400,000, that will push your total taxable income from employment + sales to the 15% bracket (which caps at $583,750 in 2024). 

Federally, you're likely to pay 15% on the gains.  You'll also owe the 5.8% Idaho income tax on top of that.  So your gains will likely be taxed closer to 21%.  And that's before paying the Net Investment Income Tax of 3.38% on all of your income above $250,000.  

AND THEN there is the 25% rate that you'll pay on recaptured depreciation from your rental property sales. 

So, unfortunately, you're likely to pay close to 20-25% on the $400,000 (based on my loose math here -- please check this with an accountant who is familiar with Idaho). That's roughly $80,000 to $100,000 in taxes. 

To avoid paying capital gains on the sale of the rentals, the most straightforward way is to complete valid 1031 exchanges on your two sales.  1031s themselves can be a little unintuitive to navigate.  I'll send you a PM about that here shortly. 

@Nathan H.,

You have two options after a 1031 exchange.  You'll want to work with your accountant on this. 

Option 1: Separate Schedules

Carryover: Continue depreciating the remaining cost basis from the relinquished property over its original depreciation schedule (e.g., 17.5 years remaining for residential property).
New Schedule: Simultaneously, start a new depreciation schedule for the additional cost basis attributed to the replacement property, following standard timeframes (27.5 years for residential, 39 years for commercial).

Option 2: Treat as New Asset

Combined Basis: Treat the entire cost basis of the replacement property (carried-over basis + additional funds invested) as if it were a newly acquired asset.
Single Schedule: Depreciate the total cost basis over the standard timeframe for the replacement property type (27.5 years for residential or 39 years for commercial).

If you choose option #2, you need to file an additional form (4652) with your tax return. 

@John Haelig,

From what you've written, I think your first option is to look at 1031ing into a passive investment of some stripe.  DSTs are the most widely known passive 1031 replacement option, but they are far from the only one. 

The 1031 exchange (if executed correctly) will defer all of those long-term capital gains, depreciation recapture, and the NIIT taxes (3.8%) along with state taxes. 

Tax deferral isn't everything, though, and I wouldn't rush you into a 1031 if you can't find a property that you like and that makes the math work for you. 

Which brings me back to the idea of looking at multiple passive cash-flowing options.  You could also buy a traditional property and hire a property manager, but in this scenario you end up paying property manager fees (and likely higher-than-you-like financing costs to replace the debt from your condos). 

There are plenty of NNN tenant-in-common investment providers out there, along with DST sponsors, deal syndicators, etc. Some are on BiggerPockets. Some advertise very aggressively on Google, so you can just do a search. We've been in this space for 31 years and I can certainly share some resources with you.

@Frank Macias,

I can relate to your circumstances.  My wife and I are in our late 30s, we have a 2 year old son and are about to welcome a new baby. The idea of generating passive income through our investments is very attractive because, well, we've got full hands. 

(We regularly invest into indexed ETFs for this reason)

Look, you could certainly 1031 exchange to save taxes and find another property.  Since you are trading out of vacant land, you are looking to dump an asset that didn't require much management.  Investing into another residential rental doesn't make a ton of sense from my distant vantage point. 

What Dave says about the after-tax effects on selling and going the equities route is true.  It's a big selling expense. 

Perhaps look at 1031-eligible investments that are passively managed and effectively act like equities. There are deal syndications and DSTs, for example, or some NNN TIC properties that might work for you. You could go oil/gas rights. This way you are keeping passive income and saving the tax hit.

I would just lightly advise away from complicating your day-to-day life at this point given what you've told us. 

@Yonah Weiss is an expert in cost segregation.  Maybe you should check in with him @Christopher Jordan.

@Lesley Stoll I want to piggyback on what @Jaron Walling mentioned about 1031s not being as easy as some preach.  This is very true, and even more true in today's market where financing costs are higher but prices haven't adjusted fully to compensate this. 

Remember that in any 1031 exchange:

          - what property(ies) you buy have to be worth at least as much as what you've sold (net of closing costs but not net of mortgage)
          - all of your equity ($2.4M) needs to go as down payment on what property(ies) you buy

1031s are not good at deleveraging.  It's possible to deleverage in an exchange, but only if you accept some tax hit (partial exchange) or bring outside cash to the table, which can hurt your ROE. 

All that said, depending on how low your adjusted tax basis is, having a taxable sale would be extremely costly.  You want to investigate the full range of possible 1031 options (residential, commercial, syndicated, active, passive, oil/gas/solar, etc.) if you're hunting for income.  Remember that you can diversify and reinvest into multiple properties/sectors. You can reinvest into sponsored investments or funds that don't require you to go out and personally borrow money at today's rates.

As a 1031 accommodator, I'm clearly a fan of exchanging.  But it's only right if you find the right landing spot(s). 

@Jessica Hamilton,

I'm happy to say that taking bonus depreciation on your STRs won't affect your ability to do a 1031 exchange. 

And there's no problem 1031 exchanging from properties used for STR and reinvesting into properties used for LTR.

Now, you still have to comply with all of the standard 1031 rules -- including (A) buying properties that are at least as valuable as what you sell, and (B) moving all of your equity from the STRs into the LTRs -- then you may still pay some taxes even with a 1031.  But that's not due to your bonus depreciation. 

@Ryan Cleary,

In a prior life before 1031 exchanges, I worked with a national firm that worked to evict thousands of tenants from underperforming properties across the country.  My experiences there tell me that personally evicting is a huge headache. 

By the time that you provide your notice and file an eviction lawsuit, the tenant fights back, you have a hearing, etc... you're going to spend more than a month anyway.  And the likelihood of the property receiving more damage for you to repair goes up. 

I wonder if you see any reason not to take @Greg Scott's advice and simply refuse to renew her lease. 

@Bruce M.,

Bruce, holding a property for potential appreciation (i.e. not actively generating rental or business income) is a valid tax strategy.  You're not risking your prior 1031 exchange by simply changing the strategy you use. 

Unless you've spent a lot of personal time using the property, letting your asset sit will not compromise your 1031.  Remember that 1031 exchanges are ultimately about your intent to use the property for long-term business or investment purposes.  

If you are spending a lot of personal time there, I would speak with a CPA about whether or not to continue to list it as a depreciable investment asset on your tax returns. 

There are no tax issues with restarting it as a rental in a few years. 

@Ana Brasher,

There is no official declaration or form that is required by the IRS or your state Department of Revenue when you start using the vacation property as a rental.  You simply start treating as a rental. 

On your subsequent tax returns, you'll list the property as an income-producing asset, you'll take your depreciation, and you'll declare any income that you generate from the rents. 

Whenever you sell down the road, the IRS will consider your eligibility for a 1031 by looking at your prior tax returns to see that you held it for investment.  (And even then, they only really look if you are audited)

Just start renting!  When you want to sell, double check with a qualified intermediary to see if you're going to qualify for a 1031.  You almost certainly will.