Avoiding Capital Gains Taxes on Real Property Sale

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nolesinvestor
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Avoiding Capital Gains Taxes on Real Property Sale

Post by nolesinvestor » Fri Nov 08, 2019 3:24 pm

My wife and I are looking at selling a rental property and are trying to find the best way to avoid capital gains taxes.

The property is a condo that my wife bought in July of 2013. We got married in 2015 and lived in the condo for a few months. In October of 2015 we moved out of the condo and bought a second condo. We have rented the first condo to tenants since then. We are now looking at selling the first condo but want to avoid paying capital gains taxes as much as possible. Even though my wife lived in the property for over two years, I don’t think we can avoid capital gains taxes since we have leased the property for almost 4 years. Another option I thought of was using the proceeds to payoff/refinance some of the mortgage on the second condo. However, I’m not sure if this will qualify as a like-kind exchange to avoid the capital gains taxes. We are open to any possible options. Thanks for the help.

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Nate79
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by Nate79 » Fri Nov 08, 2019 3:30 pm

As far as I know your only option is to do a 1031 exchange which delays (not avoids) the capital gains. Otherwise you are going to have capital gains and depreciation recapture as I'm sure you are aware.

fabdog
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by fabdog » Fri Nov 08, 2019 3:41 pm

Another option I thought of was using the proceeds to payoff/refinance some of the mortgage on the second condo. However, I’m not sure if this will qualify as a like-kind exchange to avoid the capital gains taxes
This would not qualify as a like kind exchange. You would need to use the proceeds in exchange for a like property, not pay off a debt on a property you already own. This would delay the recognition of gain

There is a partial exclusion available, but you'd need to look at IRS Pub 523 to see if you qualify based on a job move or health/other reasons. But given it's been 4 years and now you are selling, not likely you could meet those tests

Of course, you want to make sure your basis is accurate to minimize any capital gain. So you should have established basis when you began renting, of the fair market value of the condo. and added to basis (and depreciated) any upgrades/major repairs that weren't expensed. And of course any selling expenses will be deducted from your proceeds when figuring the cap gains portion. Depreciation recapture is 25% tax rate

Mike

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unclescrooge
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by unclescrooge » Fri Nov 08, 2019 3:59 pm

Other than a 1031 exchange, or an investment in an opportunity zone, your only other option is to move back into the house and make it your primary residence for a certain period of time.

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Nate79
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by Nate79 » Fri Nov 08, 2019 4:18 pm

unclescrooge wrote:
Fri Nov 08, 2019 3:59 pm
Other than a 1031 exchange, or an investment in an opportunity zone, your only other option is to move back into the house and make it your primary residence for a certain period of time.
I thought that the gain during the rental period is still there no matter you move back in the house? Tax experts should comment but I thought this was a loophole that was closed but could be wrong.

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sk2101
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by sk2101 » Fri Nov 08, 2019 5:03 pm

Nate79 wrote:
Fri Nov 08, 2019 4:18 pm
unclescrooge wrote:
Fri Nov 08, 2019 3:59 pm
Other than a 1031 exchange, or an investment in an opportunity zone, your only other option is to move back into the house and make it your primary residence for a certain period of time.
I thought that the gain during the rental period is still there no matter you move back in the house? Tax experts should comment but I thought this was a loophole that was closed but could be wrong.
If they make it their primary residence, then all the gains are excluded up to $500K (married), no matter when the appreciation occurred. What they will be hit with is the depreciation recapture, there is no way around that on a sale.

However, the bar to make a primary residence is pretty high - it's a minimum of 2 years in the 5 years preceding the sale. So if the condo no longer fits the needs, living there for 2 years would be a big sacrifice.

Small Savanna
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by Small Savanna » Fri Nov 08, 2019 5:18 pm

Sell the 2nd condo, take the profit with primary residence exclusion. Then live in the first condo for two years and sell it, also taking the primary residence exclusion. You have to decide if the capital gains savings is worth the trouble.

MarkNYC
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by MarkNYC » Fri Nov 08, 2019 6:05 pm

sk2101 wrote:
Fri Nov 08, 2019 5:03 pm
Nate79 wrote:
Fri Nov 08, 2019 4:18 pm
unclescrooge wrote:
Fri Nov 08, 2019 3:59 pm
Other than a 1031 exchange, or an investment in an opportunity zone, your only other option is to move back into the house and make it your primary residence for a certain period of time.
I thought that the gain during the rental period is still there no matter you move back in the house? Tax experts should comment but I thought this was a loophole that was closed but could be wrong.
If they make it their primary residence, then all the gains are excluded up to $500K (married), no matter when the appreciation occurred.
That is not correct. Any gain allocable to periods of "nonqualified use" is not eligible for the exclusion. Nonqualified use is generally any period after Jan 1, 2009 when the property is not used as a principal residence, prior to the period of principal residence use. So if they moved back in today for 2 years then sold, only a small fraction of the gain would be eligible for the exclusion based on the ownership dates given.

This provision in the law was enacted to prevent taxpayers from taking vacation homes or rental homes they had owned for many years and moving in for 2 years and then excluding multi-years or decades of appreciation, which was seen as an abuse of the original intent of the principal residence exclusion.

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unclescrooge
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Re: Avoiding Capital Gains Taxes on Real Property Sale

Post by unclescrooge » Fri Nov 08, 2019 6:08 pm

MarkNYC wrote:
Fri Nov 08, 2019 6:05 pm
sk2101 wrote:
Fri Nov 08, 2019 5:03 pm
Nate79 wrote:
Fri Nov 08, 2019 4:18 pm
unclescrooge wrote:
Fri Nov 08, 2019 3:59 pm
Other than a 1031 exchange, or an investment in an opportunity zone, your only other option is to move back into the house and make it your primary residence for a certain period of time.
I thought that the gain during the rental period is still there no matter you move back in the house? Tax experts should comment but I thought this was a loophole that was closed but could be wrong.
If they make it their primary residence, then all the gains are excluded up to $500K (married), no matter when the appreciation occurred.
That is not correct. Any gain allocable to periods of "nonqualified use" is not eligible for the exclusion. Nonqualified use is generally any period after Jan 1, 2009 when the property is not used as a principal residence, prior to the period of principal residence use. So if they moved back in today for 2 years then sold, only a small fraction of the gain would be eligible for the exclusion based on the ownership dates given.

This provision in the law was enacted to prevent taxpayers from taking vacation homes or rental homes they had owned for many years and moving in for 2 years and then excluding multi-years or decades of appreciation, which was seen as an abuse of the original intent of the principal residence exclusion.
Good to know. Thanks for the clarification.

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