Should I sell the property under 1031 or not?

Question

Okay I have a little over 200k in equity on my first rental house. I plan to use the equity to jump into a larger complex. I have looked up and studied 1031 exchanges for a while now knowing I’ll be selling when the current tenant lease is up in October.

My business partner said he spoke to a tax professional and I have confirmed since I recently lived in the property 3/5 years there won’t be any capital gains.

My question is, is it worth it to do the trade up on a 1031 or just sell the property and leave it open for new properties. I have not done a 1031 but I know I would use a 1031 professional. However 1031 has its limits.

What other taxes would I pay selling the house? Income tax?

Dave Foster · Answer

@Jake Waslaski, It all depends on how much depreciation recapture there would be. Because this is a rental now and because you qualify for the primary residence exclusion you can actually take advantage of both - and take the capital gain tax free with the 121 exclusion and defer the depreciation recapture in a 1031 exchange.

Qualifying for both is like winning the lottery. Great opportunity for you if the depreciation recapture amount justifies.

Jake Waslaski · Answer

@Dave Foster thank you for your reply I’ll dig a bit deeper and get it sorted out. Never heard of a 121 so I’ll look into it

Dave Foster · Answer

@Jake Waslaski, sec 121 is the section your business partner was referring to that will allow you to take the capital gain portion tax free. The best place to read the requirements is in publication 523 of the IRS code - https://www.irs.gov/pub/irs-pdf/p523.pdf

Jake Waslaski · Answer

@Bill Brandt well said thank you for your time on this reply. I’m looking into a 121 and finding the right tax professional to help with both these

Bill B. · Answer

The equity has nothing to do with the taxes due.

In a normal rental sale you would pay 15% tax on the difference between your net sales price and your net purchase price ,=minus any additional cap ex. And then 25% tax on the depreciation you’ve claimed.

if it was a primary first and not a rental first, and you’ve lived in 2 of the last five years as your primary in its entirety (not 1/2 of a duplex, 1/3rd of of triplex, 1/4th of a quad, etc.) then you will avoid the capital gains tax and just pay the depreciation recapture. You would always do this. A 1031 delays the tax, a 121 avoids the tax.

If it was a rental first you only avoid some of the tax, if you only occupied part of the property you only avoid some of the tax. Then if the GAIN (not the equity) is large enough you could do both a 121 and a 1031.

Should I sell the property under 1031 or not?

Should I sell the property under 1031 or not?

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