Tax implications and advice

10 Replies

Hi BP community, First time post but I have enjoyed reading and learning from others experiences. I own a 4plex in Fresno and single family home in the Bay Area and just recently sold a property that I profited 209k from. The sell of that property was for 415k total. My original plan was to take the profit and try to go to Indianapolis to purchase a couple of properties cash. I recently found out that to defer taxes I not only needed to utilize all the profit but also replace the debt. So when finding that out I switched my strategy to purchase a portfolio of properties. In doing that I found out from my lender that the max properties I can finance are 4. So in essence for the price range of the homes I have been looking at i am not able to purchase 415k worth of homes while being limited to mortgaging only 4 homes which has left me with the following scenarios: 1) I use all profit and mortgage some properties for a total of about 350k worth of properties. This result approx to 2,500 cash flow after putting percentage aside for maintenance, vacancy, and expenses. In this case would I be taxed 65k? (415k-350k= 65k) if so, what is the tax rate? I have read it could be 30%? 2) find homes that are more expensive to add to 415k value. This is not as intriguing to me because the ROI is much lower. I understand that buying cheaper homes is way more risky but I know folks that had been able to make it work for them really well and is just more in alignment with my risk tolerance. But this may be then most logical option I have 3) I am quickly approaching 45 days and rather than rush into something just pay the damn capital gains tax. On a 209k profit what would be an estimate tax % on that? Thank you in advance for reading and I would appreciate any feedback and perspectives.

Luis,

I AM MOT AN ACCOUNTANT.  But I can give you some general info. Federal Capital gains tax is 20%. California taxes capital gains at the same rate as your income so it will be whatever your rate is for your income plus 65K for your profit. Also if you depreciated the property you sold there will be taxes on the amount you depreciated.

That being said I am a huge fan of paying for homes in cash and having a positive cash flow right away, but not if you give away decades of profit in taxes.

If it were me, I would look for a multifamily home/apartment for the amount of your last loan + profit that gives you a good cash flow in a broad geographical location. I suspect that if you put that detail in request someone would know where geographically you can find that. 

@Luis Escobar

Welcome to BP!

Did you utilize an 1031 intermediary when you sold the property? If you haven't - you may not be eligible to defer your taxes.

You purchase price of the new acquired properties need to be above the selling price to defer all the gain.

The sale without a 1031 will result in capital gains tax(0%, 15% or 20% depending on your tax bracket).
The state will also tax you for the gain. California tax rates range from 1% to 13.3%

Basit Siddiqi, CPA
917-280-8544

Thank you both for the info!

@Luis Escobar , If you haven't engaged a QI to handle that sale as a 1031 it's a moot point.  But on the off chance that you actively in a 1031 and your QI doesn't understand the statute... You do not have to replace debt with debt.  The way to think about it is that in order to defer all tax you must purchase at least as much as your net sale and use all of the proceeds in the purchases.  For most folks in order to do that they have to replace debt with debt.  But that is not a requirement.

1. You can replace that debt with your own cash from any other source (think of it as debt to yourself if you want).  

2. You can subtract the amount of the debt from the net sale and only purchase that much.  The IRS will interpret that as you in essence taking that much profit out.  So you would pay tax on the difference between what you sold and what you purchased.  But you would shelter any remaining tax.

@dave foster , thanks for additional info. I am working with QI, but they referred me to CPA for actual tax implications. In my case it seems like I will have to switch up my strategy. I was looking at 350k worth of properties which would leave 65k to be taxed if im understanding it correctly. Although the portfolio I had found was intriguing with a solid roi I don't think it's worth paying taxes on the remaining 65k. Thanks for the info.

@Luis Escobar you may need to look for a new lender. The max Fannie loans you can have is 10. But even that aside you could look into commercial financing on a package of homes or package a bunch of houses together under one portfolio loan. I’ve never done this but have heard and read about lots of other investors doing it. 

You could also up the class of property you are looking into. There was a really good thread by @Lance Robinson . He posted about his returns and buying properties in Indianapolis close to the median value for that MSA and how that has allowed him to cash flow well AND take advantage of rising values/rents while mitigating the risks of lower class properties. The median in Indy is $143 so you could purchase 3 or 4 in that range and be good. 

for the tax rate's etc, I would definitely chat with your accountant to see what's best as he knows your finances. Usually it's based upon your profit not your sale price. Since you already have that 4 plex in fresno, what about doing a small house here of MFH with a lot of money down? With 209k to put down, you can buy a 300k-350k house or small MFH in Fresno or Clovis with minimal debt. At that price you could do a nice house in a good school district with good tenants Even if you have lower COC it may be worth it to avoid capital gains, but this just a calculation with your tax pro. You could just use this house to "hold capital" while you are waiting for your next move.

When you sold that SFH in the bay did your money move into a 1031 custodian account? Feel free to message me if I can help more.

Just throwing this out there.  Was the original 209k calculated correctly?  Was depreciation utilized on original property?  I believe the tax implication on depreciated portion (if no 1031) would be 25% depreciation recapture PLUS state tax....at least that is my understanding.  

@Luis Escobar

A lot of lenders that sell their loans to Fannie/Freddie will only give an individual borrower four mortgage loans.  If you max out the number with one lender, add another lender to your exchange strategy.  No requirement to use one single lender for all your replacement property acquisitions in a 1031 exchange.  If you want to acquire five or six properties to complete an exchange, use two or three different lenders.  Once the total number of financed properties you own reaches 10, start looking for a portfolio lender or a commercial lender for your next financed acquisition.

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