We purchased our triplex in April of this year for $260,000, we put $41,000 into it for the remodel. Our plan was to live in one unit (house hack) for 2-3 years and then rent out all three units for the cash flow after that. We were just called by an investor who would potentially offer us $375,000. 1) Should we sell it for that much? Or more? 2) If we sell it, what are our options to not pay capital gains? Would we be able to pay ourselves back for the $41,000 we invested into it if we did something like 1031 exchange? 4) Any other comments/suggestions??
I do know that 1031 facilitators usually want to see at least 1 year of seasoning before sale. I think with 6 months ownership you'd be pushing it and inviting potential trouble.
The whoesaler is just trying to get your attention. By the time you are ready to sign a contract the number will be much lower. Not sure you can quickly find a like property in 45 days and close. A lot restriction is cooking in the Congress to plug the loopholes right now. That 41K is an improvement so your cost basis is now $301k.
@Trina Pugmire , The numbers will give you an answer. But heres some things to think about.
1. @Michaela G. is right that most folks feel comfortable at more than a year holding period. But there is no statutory holding period. It must have been your intent to hold the property for productive use. There are circumstances where a hold period of less than a year is still long enough to justify a shorter holding period - as long as you can demonstrate your intent.
2.An unsolicited offer is frequently used to demonstrate intent. You didn't intend to sell but the size of the offer persuaded you - pretty much like it sounds.
3. When you do your calculations keep in mind that you can't 1031 the portion you are living in. And you haven't lived in it long enough to qualify for the primary residence exemption on that portion. So you'll be paying tax on probably $25K of that gain and only getting to shelter $50K in the exchange.
4. The reinvestment requirements of the 1031 are that you must reinvest all the proceeds if you want to avoid all tax. So you cannot get that $41K out of the sale without paying tax on it as if you pulled out profit. Since the entire tax you'll be saving is only around $50K that wouldn't be worth it. However since you're already going to pay tax on the $25K allocated to the primary side you just as well take that. If you wanted the other $16 you would also pay tax on that.
@Trina Pugmire If you are planning on becoming a real estate investor a 1031 exchange can provide a number of benefits, one of them being, tax deferral. Section 1031 states that you must have had the intent to hold for rental, investment or use in a trade or business. The IRS does not give a specific hold time requirement. Usually investors are given guidance to at least hold for 12 - 24 months because you can easily show your intent. With that being said, there are exceptions. If you have not placed the property up for sale and the offer was unsolicited and financially makes sense, then you may be able to prove (if audited) that you did have the intent to hold for a longer period of time.
If you decide to move forward with an exchange, you will need to calculate the portion of the property that was your primary residence and which portion was rental. Typically your CPA can calculate this for you. When you sell, you will only be able to reinvest the proceeds from the rental percentage. The primary residence portion won't qualify for a 1031 and won't qualify for the 121 exclusion either.
The 121 exclusion generally allows you to sell your primary residence and exclude from gross income up to 250k (single taxpayer) or 500k (for a married couple). You must have owned and lived in the property as your primary for at least 24 out of 60 months, which you haven't. So do expect some tax liability there.
If you want to withdrawal the funds that you used to update the property, you will also have tax liability on that portion. In order to successfully complete a 100% tax deferred exchange you are required to trade up or equal in value. You should replace 100% of the equity and debt. You can choose to replace the debt by taking out another mortgage or bringing cash to offset that portion.
Hopefully that helps!
@Trina Pugmire , one other conversation that comes up for house hacking: did you promise to stay in this home for at least one year when you took your (owner occupied) mortgage? Maybe, or maybe not limited on this aspect, too.