How to avoid Capital gains tax?

Staten Island, NY · Member since 2015 · 265 posts · 59 votes

Hello all, basically I am putting my primary home on the market after I recently got it appraised and I am looking at getting a large profit. I currently have lived in this home for about 14 months and I used a VA Loan. Looking to sell this and get a multi-family using the VA Loan again or perhaps even buy another SFH home and flip it like the one I currently am in. I have a few options I can do. Anyway how do I avoid capital gains tax?

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Erick Hernandez, don't bet against @Wayne Brooks :). The 1031 exchange is not available for your primary residence. It is only for investment property that you have purchased with the intent of holding for productive use in business trade or investment.

The shelter for your primary residence is found in sec. 121. If you have lived in it for 2 out of the last 5 years you can take the first $250K ($500K if married) in profit tax free.

As far as options for @Eric DeVito, there is a proration available for your primary residence if you have to move for medical or job related reasons. Your accountant can let you know if your circumstances would fit. Other than that stroke the check for taxes, look at what's left in your bank account - and smile! Once you're started on the path with investment property you'll be able to defer the tax the rest of your life with the 1031.

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
Nope, not unless you live in for 2 years, then the gain is Tax Free.....doesn't get any better than that.
1 Reply
Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Wayne Brooks Understood. So say I want to continue and sell my current property to invest in a 2 family. What is my best course of action?
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
No choice, you pay the cap gains tax.
3 Reply
Erick Hernandez
Investor · Virtually Everywhere · Member since 2016 · 7 posts · 16 votes
9y
Incorrect, 1031 Exchange allows you to invest proceeds into another property without taxing profits. Say for example you net profit 50k sale on your current property, you can use that towards a new purchase or "exchange of property" so you never actually touch your profit, it just slides into the next property. Do some research, not sure if there are any caveats with VA loans.
11 Reply
Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
Sit tight and ride out another 10 months of owner occupancy. You can still market the home prior to that (maybe 7 or 8 months from now?) just don't close until you hit the 2 year mark. Unless there are other compelling reasons to sell NOW it seems avoiding all capitals gains tax is a pretty good return on 10 months of living in your own house.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Erick Hernandez Thought so, thanks for the reply. So I might be wrong, but this is what I am thinking. I am going to use the VA Loan on say a 2 family home. I make $100,000 net profit from current SFH that I am selling. In order to avoid capital gains I have to basically roll the entire $100,000 into the 2 family home? I would really like to do 0% down via the VA Loan and use the $100,000 for renovations to the 2 family home if need be and also any left to leave in savings or use on acquiring another property. Thoughts?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Erick Hernandez, don't bet against @Wayne Brooks :). The 1031 exchange is not available for your primary residence. It is only for investment property that you have purchased with the intent of holding for productive use in business trade or investment.
The shelter for your primary residence is found in sec. 121. If you have lived in it for 2 out of the last 5 years you can take the first $250K ($500K if married) in profit tax free.
As far as options for @Eric DeVito, there is a proration available for your primary residence if you have to move for medical or job related reasons. Your accountant can let you know if your circumstances would fit. Other than that stroke the check for taxes, look at what's left in your bank account - and smile! Once you're started on the path with investment property you'll be able to defer the tax the rest of your life with the 1031.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Dave Foster So basically I have to take some type of hit on this first deal lol. Correct? If so is it still worth it?
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Hunter L.
Investor · McLean, VA · Member since 2013 · 53 posts · 18 votes
9y
Originally posted by @Eric DeVito:

@Erick Hernandez Thought so, thanks for the reply. So I might be wrong, but this is what I am thinking. I am going to use the VA Loan on say a 2 family home. I make $100,000 net profit from current SFH that I am selling. In order to avoid capital gains I have to basically roll the entire $100,000 into the 2 family home? I would really like to do 0% down via the VA Loan and use the $100,000 for renovations to the 2 family home if need be and also any left to leave in savings or use on acquiring another property. Thoughts?
Yes, all of the net profit from the sale of your current property would need to be re-invested (into another like-kind investment property) within 180 days of the sale in order to qualify for 1031 treatment.
Any proceeds not re-invested would be taxed at long-term capital gains rates.
Edit: Did not realize this was your primary residence. As noted above, the 1031 exchange is not available for use on your primary residence.
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Erick Hernandez
Investor · Virtually Everywhere · Member since 2016 · 7 posts · 16 votes
9y
No problem Ryan. If rehab costs are running 100k, I will assume the property is not in livable condition. Correct me if I am wrong. Keep in mind that the VA will not lend on a property that is not occupant ready. Same goes for regular banks, they will not lend on properties that do not pass inspection. But the VA is a little more strict. In theory, yes. You can roll 100k over, into purchase price not as equity.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Erick Hernandez I am just using that as a random number. I would assume the property needs a bit of work to make it rent ready.
@Hunter L. Yes it is my primary residence. Purchased for $255,000. Put $30,000 into it. Now listing it for $499,000. RE Agent agrees this is a good price to list at. That being said should I still go through with this since I will be taking a hit with the capital gain taxes.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Eric DeVito, "is it worth it" is in the eye of the beholder. If you stay in that house for 10 more months you'll save 20 - 25% of the profit. If you've got the ability, do a refi and then buy your next primary right now. Or buy the multi. then at 24months sell where you live now tax free and use the remaining proceeds for another piece of property, or a cruise!
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Dave Foster I understand, makes sense. I do not have the ability to buy the next primary or multi. Do not have the cash for that.
0 Reply
Erick Hernandez
Investor · Virtually Everywhere · Member since 2016 · 7 posts · 16 votes
9y
Would anyone recommend a heloc to finance the down payment of a multi family or perhaps a rehab?
1 Reply
Hunter L.
Investor · McLean, VA · Member since 2013 · 53 posts · 18 votes
9y
@Eric DeVito it depends on your personal situation/motivation for selling the property right now.
The savings on the capital gains taxes imposed on your~$215K gain could be significant, especially when leveraged into the next property.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Hunter L. Well it was to turn around my home and make a nice profit from it and then reinvest into a 2 family. Like you said though, I did not know I would take 20% hit though at the time. I already have a RE Agent who took photos and wants to hold an open house. I guess I could always see what or if any offers come in.
0 Reply
Hunter L.
Investor · McLean, VA · Member since 2013 · 53 posts · 18 votes
9y
@Eric DeVito If the need to sell isn't pressing and can wait another 10 months, it may make sense to just sell then. You'll save on the capital gains tax and the net investment income tax.
If you come across a good-looking deal on a 2-unit in the meantime, a re-fi seems to be a good option as @Dave Foster said.
*Not tax advice*
1 Reply
Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Dave Foster and @Hunter L. and @Erick Hernandez is it possible to setup a trust or put my net profits into a trust to avoid paying capital gains tax ? My RE agent is telling me we still have some options to avoid paying captain gain taxes.
0 Reply
Danny F.
Waianae, HI · Member since 2016 · 111 posts · 47 votes
9y
@Eric DeVito
I like what @Dave Foster shared. I now you mentioned you didn't have the $$ now. But when you refinance you'll have the equity to buy a multi-family unit. Then within 24 months omg...you be on your way you'll have multiple option in the direction you'd like to go in. 20-25% too me is not worth the loss for just another 10 months. That's like someone paying you an extra $2500 a month in rent. Wow! I'd take that! Just run the numbers, weigh in your options. You'll make right decision
best of luck and much aloha,
Danny
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Just wait already. Of course your agent thinks it's a great time to sell. Are 'we' giving trust and tax advice now? 'We' don't have a tax burden. You do.
You'll also be locked in a listing of you do list. No just checking to see what offers come in. If one comes in, you'll owe the commission.
You've owned your place a whole 14 months. Ants in your pants impatience has caused much pain in this business. Just hang in there. You're doing great so far.
10 Reply
Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Dave Foster and @Danny F. so that being said refinance or Helco? I have about $60,000 equity in the home.
@Steve Vaughan thanks. So my agent said he was going to list it today, should I just continue to seee what happens or just stop everything.
0 Reply
Herman Herrera
Real Estate Broker · New York, NY · Member since 2016 · 30 posts · 22 votes
9y
No question...wait the 10 months. Big surprise your agent says sell now 🙄 there are less than 800 residential properties on MLS right now (usually we have about 2,000) and new listings priced at market are selling within days. I've never seen a market like this and I've been doing this since 1994. If you absolutely can't wait the 10 months, then sell now and rent for awhile. It's a great time to sell...bad time to buy. Good luck.
1 Reply
Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Herman Herrera I understand my options. Yes my agent keeps saying there's ways around the capital gains tax. He wants to list today.
0 Reply
Hunter L.
Investor · McLean, VA · Member since 2013 · 53 posts · 18 votes
9y
Consult with an accountant/attorney who is familiar with your specific circumstances before assuming there are ways around the capital gains tax. I wouldn't take tax advice from your RE agent.
7 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Eric DeVito, If so then your agent should be able to rattle them off the top of his head. Sorry but your realtor is wrong without there being offsets deep in your tax returns that they would know nothing about.
A simple trust will not work either per the past post. A sale generates a gain or a loss. In your case it's a gain. That gain can be mitigated in a limited number of circumstances when it was your primary residence. People like @Hunter L. spend a lot of time going to school to know things like that.
Anyone making statements like that without proof seems to be simply trying to secure a listing and not acting in your best interest. Do you really want them to be your realtor?
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