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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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Dave Foster I will talk to my brother-in-law who is an accountant and knows a lot about this type of thing. He does have my listing but ultimately it is my choice if I want to sell or not. Thanks for the help.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Originally posted by @Eric DeVito:
@Dave Foster I will talk to my brother-in-law who is an accountant and knows a lot about this type of thing. He does have my listing but ultimately it is my choice if I want to sell or not. Thanks for the help.
Yes, talk to your brother the accountant. Good idea!
The listing agreement will most likely state that whether you actually sell or not, if the LA procures a buyer with an 'acceptable/reasonable/full price' (?) offer you will owe the commission anyway. I will call on my knowledgeable agent friend @Russell Brazil for the exact wording. Thanks, Russell!
Don't let transactional sales people drive your investing decisions. They are there to do transactions - in any industry. It's what they do!
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Rob Golob
Investor · Valparaiso, IN · Member since 2015 · 84 posts · 47 votes
9y
@Eric DeVito, by your numbers (buy 255K, invest 30K, sell 499K) you nominally have $214K equity, not $60K. Obviously, that assumes near 100% financing at purchase price.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Rob Golob I see, do you recommend a cash out refinance or Helco. This is sort of like the BRRRR strategy as well. Few options
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Andres Blandon
Investor · Lakeland, FL · Member since 2015 · 24 posts · 5 votes
9y
Hey @Eric DeVito I'm on the same situation and this is a topic that I have thought about recently. I own my primary home through a VA home loan and have approximately 50k in equity but don't meet the 24 month tax exemption.
My thoughts were to do a VA Cash out refinance loan. Since VA allows upto 100% of appraised value, you can get the cash out now. Then put the house on the market and sell at full price to cover your loan and technically you won't make money on the sale.
***This was a recent thought and I have yet to read anything against this. The only issue might be the lender having a prepayment penalty, which most of the time is not the case. You might even ask this question up front before the cash out refi.
Good luck and hope to hear more on this topic and how it all works out.
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Glenn R.
Cornelius, NC · Member since 2016 · 104 posts · 51 votes
9y
Good thread, with good replies.
But, now I'm worried. I received a home as gift from my father. His CPA told me if I made it my primary residence for at least 2 of 5 years there'd be no capital gains taxes. Now I see the $250-500,000 limits... It's worth a lot more than that now. (Dad refused to wait for me to inheirit it, because of the stress of it. )
Anyway, what % will the gains be taxed at? Maybe I shouldn't claim it as my primary, and perhaps rent it out for a while? Guess I should revisit the CPA. :(
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Mark Wolf
Wholesaler · Austin, TX · Member since 2016 · 1 post · 0 votes
9y
In my experience, I don't take tax advice from an Agent, and I assume it's ALWAYS a good time to buy or sell in their opinion!
Because of the 20% hit, it looks like the best thing to do would be wait another 10 months and odds are the property will appreciate a bit more in that time and you can take the time to really work on making it "show ready" so it will make the most and sell the fastest, little things can make a big difference.

On the other hand, if you just HAVE to sell now, I would really look into the PRORATED tax free thing. I've used it myself, albeit a long time ago. The rule for as stated above is that you have to have lived in the house for any 2 of the last 5 years to make it a totally tax free gain, up to $250k single, and $500k if married. Well if you aren't going to make anything close to $250k then a prorated tax free situation would be great for you if you qualify. Look at the exemptions and see if you need to move earlier than the 2 years for a job related move of medical or whatever else they are. Then since you are now 14 mo of 24 mo, 58%, when you actually close it might be 18 of 24 mo so 75% of the up to $250k gain would be tax free, well that's a lot more than you'll make anyway, if you are expecting maybe more than $100k, that's only 40% of the $250k.
SO, this is NOT TAX ADVICE, you MUST consult a professional CPA or tax atty! This is just how I recall my situation going from years ago when I was unemployed and considering a job related move, I was able to take a PRORATED gain, which was my whole gain tax free since it was way less than $500k anyway.
So, IMHO, don't sell and take the hit, but rather sell & prorate your gain, or wait! And keep in mind, even if you wait, you can certainly start your RE investing business and learn from BP how to do tons of deal "Sub2" and wholesales, etc that don't require any of your own cash nor being credit-worthy. So, you don't need cash to be a RE Investor.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Glenn R., No need to be worried. Although if you're going to be worried that a nice thing to worry about! Those are the limits for a primary residence but if you're wanting to move and the gain is larger than those limits there is a way to combine the primary residence exclusion and a 1031 exchange to completely avoid all tax.
If you've now lived in that house for 2 years then go ahead and refi it or use another loan to buy your next primary residence. Move into it and convert this current primary into a rental. After a year or so (but less than 3) you could sell the new now rental and do a 1031 exchange but taking $250K 04 $500K in boot. Boot is normally taxable but because you qualify for the primary exclusion that becomes tax free and the remainder is sheltered in a 1031 exchange. You'll need some guidance along the way from your accountant and your QI but it's a very elegant solution to get money tax free and continue to build your portfolio tax deferred.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Mark Wolf Great post. I understand. Well yes the idea is to buy 2 family via the VA loan after I sell this house. I'm also wondering if I fall in the 15% tax bracket I was reading about and also maybe use a military disability to avoid tax gain. I was reading on google and found these maybe some options for tax exemptions. Still trying to take it all in but I have my brain working lol.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Andres Blandon great post. Yes similar situations. You brought up an interesting option with the va refinance. Not sure if that is possible or perhaps getting a heloc might work
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Glenn R.
Cornelius, NC · Member since 2016 · 104 posts · 51 votes
9y
Originally posted by @Dave Foster:

@Glenn R., No need to be worried. Although if you're going to be worried that a nice thing to worry about! Those are the limits for a primary residence but if you're wanting to move and the gain is larger than those limits there is a way to combine the primary residence exclusion and a 1031 exchange to completely avoid all tax.
If you've now lived in that house for 2 years then go ahead and refi it or use another loan to buy your next primary residence. Move into it and convert this current primary into a rental. After a year or so (but less than 3) you could sell the new now rental and do a 1031 exchange but taking $250K 04 $500K in boot. Boot is normally taxable but because you qualify for the primary exclusion that becomes tax free and the remainder is sheltered in a 1031 exchange. You'll need some guidance along the way from your accountant and your QI but it's a very elegant solution to get money tax free and continue to build your portfolio tax deferred.
Glad to hear there are solutions. I've only had it since June 16', so I have time to cunsult and lay out the best plan for it. I remember seeing your site a while ago when reading about 1031 exchanges. I like the idea of keeping it in real estate.
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Ed L.
Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
9y
Lose money : )... Or do a 10-31 exchange if you are hell bent on making money.
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Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
9y
@Eric DeVito
You need to talk to a CPA, but here is ONE possible way of doing it:
1) Sell house
2) 1031 exchange into a slightly more expensive house, creating new cost basis and profit
3) Sell new house for price paid
Poof. No more gains. ;-)
@Eric DeVito
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
9y
@Erick Hernandez
IRC Section 1031 only applies to investment property. The OP said it was his personal residence for 14 months, that's not an investment per IRS and does not qualify for a Section 1031.
IRC Section 121 applies to personal residences, totally different rules, must live there for 2 of the last 5 years (btw thats what you should do @Eric DeVito) single people get $250,000 capital gains tax free, $500,000 for married folks.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
There simply is no way around the cap gains tax if you sell now, trust or no trust, period. Why don't you have your agent tell you Exactly how to avoid the cap gains tax?
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
Originally posted by @Erick Hernandez:

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.
I know you got a bunch of up votes. but are you 100% sure that a 1031 exchange allows you to defer gains from a personal residence into an investment property. The 1031 is a like kind exchange and on the IRS website it says:
Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
2 Reply
Erick Hernandez
Investor · Virtually Everywhere · Member since 2016 · 7 posts · 16 votes
9y
David Krulac Joe Splitrock Thank you for the clarification, gentlemen. Great interchange of ideas from everyone.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
Spoke to my brother and the realtor. I will hold off the listing until April/May and the 2 year mark is in September. I should be good that way to avoid the taxes. Thank you all.
2 Reply
Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
Originally posted by @Erick Hernandez:

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.
@Erick Hernandez I am fairly certain the property cant be owner occupied to do a 1031 exchange. And I think (although I could be mistaken one) this that it has to have been a rental property for a certain period of time to be eligible for a 1031.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
Another update -- Need opinions. So my RE agent and I were speaking and thinking of a different scenario. He is saying why don't I just rent out my home I am living in now and take out either a home equity loan or line of credit to get another property. My current mortgage is $1250 a month and he is saying he can get a rental rate between $2500-$2800 for my SFH in my area. Thoughts?
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
Originally posted by @Wayne Brooks:

Nope, not unless you live in for 2 years, then the gain is Tax Free.....doesn't get any better than that.
I think there is a max on the capital gains, something like 550K or 600K and then it is subject to taxes.
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Ross Greene
Real Estate Agent · Las Vegas, NV · Member since 2015 · 97 posts · 28 votes
9y
That is crazy in my opinion that your agent is giving you advice that you can "get around" capital gains. He may be just looking out for his own wallet. Wouldn't be the first time an agent gave bad advice to get a sale.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Ross Greene Yea so I found out is quite new at his job. He said he has only been doing this for over a year. I think I know more then him being on this forum for over a year lol. I had to advise him on why I should wait and about the taxes that will be taken from my profit if I sell to soon.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Mark Wolf
So Mark what small things or things in general can I do to make the house "show ready" when the time comes. Like adding flowers to the garden? I was thinking of putting new fencing around the front yard of the house. It is not that big of an area.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Alan Grobmeier, Unfortunately, even if @Eric DeVito could do a 1031 (which he can't because it's his primary) it would not work the way you describe. When you do a 1031, the adjusted cost basis of the old property is carried over to the new property. The profit does not disappear. So even if you sold the new property for the same amount you paid for it you would still incur the same original tax bill.
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