Tax Due when selling part of 1031 Exchanged Property

[Richard Chang]

Hi BP'ers and Pros,

I am considering buying multiple SFRs in a 1031 Exchange of my Tri-plex.

Obviously, this will defer any taxes, capital gains etc.

So for a simple example, I will buy 4 x 250K = $1M in a 1031 Exchange.

Let's say my total tax burden would have been 300K.

So, if in the future I decide to sell one of the 4 houses that were part of a 1031 exchange

at say 250K ( same price ) then would I pay a prorated capital gains tax of  75K ( 1/4 of 300K ) or would then entire tax on $1M become due ?

Thanks, R

[Brandon Hall]

@Richard Chang it depends on how you allocate the basis of the 1031. For instance, unless you are buying 4 identical houses, you will likely not maintain the exact same basis in each. There are a variety of methods and valuation models to use when allocating basis. 

But, let's assume the houses are identical and we are using your numbers. We have a built in capital gain of $75k and depreciation recapture of $50k. The capital gain is taxed at 15% unless you are are in the 39.6% bracket or have a lot of deductions placing you in the 10% or 15% tax bracket. Capital gain tax = $11,250.

Section 1250 recapture (depreciation recapture) is taxed at a minimum 25% rate. Section 1250 recapture = $12,500.

Total Tax = $23,750.

If you qualify for the Net Investment Income Tax, you will enjoy an additional 3.8% tax on your net investment income exceeding thresholds depending on your filing status. 

You will also have applicable state taxes to pay. 

There are plenty of tax deferral strategies out there. I'd recommend connecting with a real estate CPA and see what they have to say.