How to avoid Capital gains tax?
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
How to avoid Capital gains tax?
Most Popular Reply
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.
The 1031 Investor5137 Reviews
103 Replies
- Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes9yEric DeVito if the value of your house has gone up THAT much in just a little over a year I would definitely not sell. By your numbers: 255 + 30 = 285k. Now worth 499k...a difference of 214k. If youve been in the house for 14 months that's about $15,285 increase for every month you've owned it. I really doubt you'd ever be able to beat that in cash flow. I think you'd be crazy to kill that golden goose. Even if you continue to get a third of that appreciation you have a huge winner of a property and my bet would be that your rent growth would be huge over time as well. If your rent numbers are on point then For me it would be a no brainer to rent it out and just take out a HELOC to help buy another house. If you can't use VA and zero down just go 5% conventional on your next. You'll cashflow now, be able to tap some equity, and be able to keep your current house.
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@Ryan E. Yes so I mean we were going to list it at $449,000. Still a nice difference profit wise. So I am thinking what to do. Like I said my realtor says he can 100% find me a renter no problem. I do live in a nice area. He says he is confident he can get me between $2500-$2800. I checked rentometer it says average is $2100, but can go as high as $2800.
My thing is that it is hard to get another deal like this one I got on my home now. What type of property would I get with a HELOC? I only have about $60,000 in equity and I am looking in Staten Island, New York. I could get a two-family, but it wont be in a nice part of town. Staten Island does not have homes for $60,000 like other states lol. Probably C class neighborhood. I could use the VA loan again if I want to stick it out in that type area which I would, I don't care to be honest. I am just a bit nervous because it all sounds good profit wise, but I feel might be to good to be true at the same time. My RE Agent says he knows a mortgage company who would work with me to get me a HELCO. Should I at least talk to them?
- Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes9y
Originally posted by @Eric DeVito:
@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.
Do not use your Real Estate Agent for tax advice.
- Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes9y
@Eric
@Eric DeVito I would talk to multiple mortgage companies but specifically credit unions. Out here in UT I was able to get a 100% LTV HELOC on my primary through a credit union. The interest rate is quite a bit higher than an 80% LTV but still much better than a hard money loan. If you do an 80% LTV HELOC you should have access to about 114k (80% of 499k is 399k. 399 - 285 is 114...and that could be 144 if you used 30k of your own cash on the renovations). So I'm not too sure why you are saying you only have 60k in equity...unless I missed something in the thread. You might just need to get another appraisal or something. My credit union didn't even do an appraisal...just some kind of comparable sales analysis.
I'm not familiar with your market at all but let's say you can owner occupy a duplex that costs 500k @ 5% down your down payment would be 25k. Still plenty left to play with for renovations or a higher purchase price. And the cash flow from you current house would cover the HELOC payment.
Sorry if my numbers are off. This is just what I would do based on the info you've given. Your goals could be totally different. Either way these are the good type of problems to have!
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@Ryan E. I apologize Ryan. So I am somewhat new to this type of situation. I am saying I have 60k equity in regards to the original purchase price of the property which was $255,000. I put $50,000 down payment and now have made at least 15 months of payments which my monthly payment is about $1,250. I still have around $190,000 left to pay off. I have not gotten an official appraisal just whatever comps the RE Agent ran for me. So basically your saying my equity will increase due to the current appraisal value of my home? If so, than that gives me a lot more to work with. I just am worried because I would have to pay off the home I am in now, the next home I get with the HELCO funds and I would have to pay the Helco back to the bank/credit union. Correct me if I am making a mistake anywhere please.
Also a duplex would be great. If I can use the VA Loan on it, I would do owner occupy for sure. It is just very important I get that rent range of $2500-$2800 on my primary home like me RE Agent says I can get.
- Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes9y
Yes. Your equity is up to whatever the current value is and yes you'd have the payment on your current house, the hypothetical next property and the HELOC BUT the rent you get off your current house should cover the HELOC payment as long as you don't go crazy with the line of credit and if you owner occupy a multi unit your rents might get you close to living rent free depending on the deal you are able to find.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes9y
@Andres Blandon Refinancing to get a larger mtg has No effect on gain.....your basis is how much you paid for it plus any improvements, not how much mtg you have.
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@Ryan E. Okay, I understand exactly what your saying. So what steps should I then take to go this route. It seems like a pretty good idea. Let me RE Agent know or contact a few credit unions and apply for a HELCO? Most important is me finding a good deal on that 2nd house.
- Investor · Lakeland, FL · Member since 2015 · 24 posts · 5 votes9y
Originally posted by @Wayne Brooks:
@Andres Blandon Refinancing to get a larger mtg has No effect on gain.....your basis is how much you paid for it plus any improvements, not how much mtg you have.
Hi Wayne,
I would appreciate if you could explain further. I was under the impression that when a person sold their property they would deduct the mortgage and all other closing costs from the sale price. Then remaining funds would be considered income? I may be wrong.
what would happen if the mortgage and closing cost equal to the sale price and there is no income from the sale? But the seller had previously cashed out through refinance.
This is one of the reasons I decided to hold on to my property.
- Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes9y
@Eric DeVito yeah you can start contacting credit unions/banks to ask about the HELOC right away. You can shop around for different interest rates/terms etc. once you find one you like you can apply for the HELOC. You can let your RE agent know that you don't want to list your house but that you could be in the market for a duplex/triplex/fourplex (if that's what you want). Your agent can start sending you properties that come up on the MLS where you might want to live/that are in your price range. The HELOC will take probably around a month to be approved.
Again, if it was me I'd look into doing the BRRRR strategy with your HELOC on your next property and then refinance your money back out and keep buying properties over and over. If you aren't familiar with BRRRR send me a message and I'd be happy to explain it. It's talked about a lot on BP.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes9y
@Andres Blandon Your gain from a property has absolutely nothing to do with how much money you have borrowed against it, or how much cash you walk away with from the closing.
Your gain simply is what you sell it for, less what you paid and for it, plus any improvements you made to it. Yes, you get to include/deduct closing costs on both transactions.
Example: bought for $102k including closing cost
$10k in renovations
Sell for $200, less $8k in closing cost/fees, so net proceeds of $192k
So: your cost basis is $102 plus $10k, for a total of 112k....you net $192k from the sale....your Gain is $80k.
It doesn't matter if you paid cash which would give you $192k cash net from the sale, or if you refinanced just prior to the sale for $192k giving you zero cash from the sale.....your taxable gain is still $80k (you pocketed your cash/gain when you refinanced). This is ignoring any depreciation recapture.
- Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes9y
@Eric DeVito Am I missing some reason why you are continuing to deal with your current agent? He didn't understand capital gains or RE tax in general and gave bad advice. He admitted to being new, and you admitted to probably knowing more about RE than him. Now you're listening to him talk about market rent and how quickly he can fill it? He isn't a CPA, and he isn't a property manager. He seems very eager, but eagerness at your expense is the wrong kind.
Unless you just want to move I'd look at the VA cash out refi and use that to fund an investment property. Not an owner-occupied, but a regular investment. No taxes paid, but you get to free up that equity and put it to work.
- Real Estate Agent · Scottsdale, AZ · Member since 2016 · 53 posts · 10 votes9y
Originally posted by @Hunter L.:
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.*
I absolutely agree with @Hunter L - don't take any advice that is outside of any RE agent's scope of expertise, especially taxes. Best to get your answer from a real estate lawyer and/or accountant.
Edit: Sorry, I jumped ahead. Thought it was important to point this out.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes9y
Originally posted by @Steve Vaughan:
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!
Steve is right that most standard listing agreements state commission is due if a buyer is delivered with acceptable terms. The only times I've seen people try to enforce this when no sleep actually happens is when the seller derails the transaction and the listing agent already has money into the marketing of a property. A reasonable agent would not enforce and just ask for their costs to be covered. I've never run into the situation since very often I'm telling people to hold onto their property, so when they choose to sell they are serious about doing so.
You should just wait til you can get the money tax free. Although another consideration is rising rates. I don't think that will negatively affect your value, but it will increase your borrowing costs on the next property. But not enough to out weigh thr tens of thousands in taxes most likely.
District Invest Group546 Reviews - Investor · Inver Grove Heights, MN · Member since 2016 · 29 posts · 20 votes9y
If it were up to me, I would cash out refinance or get a heloc to use as a down payment on another property and ride out those short ten months. Time flies when you're working on other deals. However I don't know the full extent of your situation. Sounds like either way you'll walk away with a lot of money, well done!
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@Aaron Abraham That is another option. So which is better Helco or cash out refinance? If I go this route, I was thinking of just renting my current home
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@Bryan O. I understand what your saying. I like he is eager though and hardworking. I've dealt with agents who act like I don't exist or they just disappear and do not keep me updated. This RE Agent does property management also he says.
I did check Craigslist and rentometer and the rents seem to be around the number he gave me. More so around $2100-$2500. My current mortgage is $1250. That being said VA cash out refinance or Helco? Also say I did rent out my current home within next few months and wanted to sell in say 6 years I would still get hit with capital gains tax correct? Technically I would have not lived in for 2 years primarily still.
- Bossier City, LA · Member since 2015 · 122 posts · 50 votes9yStop everything and ride it out. Your agent will probably be pissed but you have to do what's best for your business. The capital chains on that would be huge.
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@Michael Bertsch Everything is stopped. We're just discussing another option of possibly me just keeping the house and renting it out. Realtor states my home can rent from $2500-$2800. While my mortgage payment is $1250 a month. Also then take out a Helco or refinance to get another property using equity.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes9y
@Andres Blandon and @Eric DeVito
Refinancing right before selling does get you cash out, but has NO EFFECT on capital gains tax. Capital gains are figured using your sale price + sale costs minus purchase price + purchase costs. no where in the calculations is financing. Capital gains is the same whether you have 100% financing or 0% financing, same capital gains.
For me the first choice would be to stick it out to meet the 24 months holding period for a personal residence.
My second choice would be to keep the property as a rental and buy a new personal residence.
My third choice would be to re-finance and take money out and either continue living there or keep as a rental.
And only my fourth choice would be to sell before the 24 months, pay the capital gains and move on. By doing this fourth choice you prevent yourself from using a 1031 (not an investment) and using 121 (since you don't meet the 24 month minimum ownership and residency). It the worst of both worlds.
Why chose the the worst choice when you have three better choices?
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes9y
If you rent out now and sell in 6 years you'll have to pay capital gains tax unless you do a 1031. And if you think you want to use 121, you have to live there 2 of the last 5 years to qualify. so you could live there for 10 more months ANYTIME within the last 5 years and qualify for $250,000 single $500,000 married capital gains exception, provided of course that the tax laws don't change in the next 5 years.
From a historic prospective it USED to be:
1. You could only do the personal residence tax free once per lifetime!
2. you had to purchase a higher priced house.
3. You had to be over 55 years old
That's what the tax law was before 1997.
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@David Krulac Great information, thanks. Either I am going to stick it out and wait for the 2 years to be up or I'm going to use the equity I have to get a HELOC or refinance and get another property. I can then keep this current home as a rental.
If I do decide to rent out my home before the 24 month period and just say I keep it as a long term rental passed the 5 year mark I would still get hit with capital gains tax if I did decide to sell say in 8-10 years. Correct?
Right now my mortgage is $1250 a month and my RE agent says I would be able to rent the house between $2500-$2800 a month. I don't mind keeping it as a long term rental if I will be getting that type of return.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes9y
@Eric DeVito yes own the property 10, 20 50 years, still owe capital gains tax when you sell.
Three ways to avoid capital gains taxes:
1. Section 1031 or Section 121 IRS code. as already discussed.
2. NEVER SELL, David Schumacher wrote a book Buy and Hold Forever
3. Die and get the stepped up basis.
I'd recommend # 1 or # 2
- Staten Island, NY · Member since 2015 · 265 posts · 59 votes9y
@David Krulac Understood. So I assume many ppl get hit with capital gains tax. People who have to relocate for a job or a family who just feels like moving to a different state and just wants to sell the house. I would assume not many people know about the living in the residence for 2 years out of 5 either.
Also how does flipping get involved in this. Flippers have to flip and sell quick as possible I imagine so how do they avoid taxes? Just curious.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes9y
Many people who sell have little or no gains to be taxed, depending on where and when you bought.
And Capital Gains Federal Tax is 20% for most people far lower than the top Federal Rate of 43%+ so paying capital gains tax is 50% lower than the ordinary income Federal rates.
Flipper or anybody owning an asset for less than 1 year get hit the hardest and pay ordinary incoem rates.
Flippers also CAN NOT
1. Use 1031 Tax Free Exchange
2. Use installment sales treatment
3. Use Depreciation
Join the conversationCreate a free account to reply, vote on answers and follow this thread.