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
@David Krulac Right. Still 20% out of a net profit can be a lot of money, example my situation if I sold the house now. I would be losing like 50,000 to capital gains. Wish the rule lasted longer then 5 years lol.
If flippers get hit so hard then why flip? I guess it depends on how great of a deal you get on the house your going to flip or you make such a large profit that the flipper does not care about being taxed.
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
9y
Flippers don't get hit any harder than any other ordinary income, the rate is the same as a W-2 job. While you should consider taxes in your investments, it should not be the only consideration. If you don't want to pay taxes then don't make any money, that would be the #4 way not to pay capital gains taxes @Eric DeVito
To pay $50,000 capital gains tax at 20% rate for 14 months ownership means that you made $250,000 net capital gains on one property in 14 months. Personally I wouldn't complain, I would probably do one of the other directions to avoid the tax . But if you don't want to do any of the above, then just pay the tax, you'll still net $200,000 AFTER tax, and that's pretty darn good in my book.
@Eric DeVito
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
9y
@Eric DeVito
I wish all my deals netted $250,000 in 14 months, the title of my book wouldn't be limited to $12 million!
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
9y
@Eric DeVito
Lets see i did over 900 real estate deals at $250,000 per deal that would be $225,000,000.00, that's $225 Million and net of $180,000,000.00 or $180 Million. I'd take it and pay the tax, but that's just me.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@David Krulac Yes I suppose taxes is part of the game. If your still making a good amount of profit it is worth it then. In my case I don't mind waiting to avoid the tax and pocket the extra money. Either that or I'll just rent and hold the property. Thanks for all the great information.
Now just have to worry about the 2nd propoerty that I will want to acquire if I decide to take out a Helco or do the VA refinance
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Adrian Tilley
Residential Real Estate Agent · Broomfield, CO · Member since 2013 · 390 posts · 125 votes
9y
Originally posted by @Eric DeVito:

@Herman Herrera I understand my options. Yes my agent keeps saying there's ways around the capital gains tax. He wants to list today.
You need to stop listening to your agent for tax advice. He/She is not qualified to give this advice, is probably doing this inappropriately, and appears to be incorrect. As everyone has told you so far, you are probably better off waiting a few months to list and get an extra few tens of thousands when you sell. You can't avoid the tax.
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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, Flippers have the worst of all worlds tax-wise. They don't get capital gains rate. They can't use the 1031. They pay not only ordinary income but also self employment taxes and the ACA surcharge (until it's repealed anyway). Tax on flipping income can be as much as 40% - 50% of the profit. But flippers get to do lots of deals. Which just feels like more work to me :)
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Luke Miller
Pittsburgh, PA · Member since 2016 · 4 posts · 0 votes
9y
If it will sell listed today, then it will sell listed 2 weeks from now when you decide your best route for dealing with capital gains tax. The house's value should not detonate overnight.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Dave Foster sounds like a headache due to all he money flippers have to payback in taxes but like you said if you are making a lot of deals then are profiting I guess as a flipper it workout fine as long as money is going in your pocket.
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Aaron Abraham
Investor · Inver Grove Heights, MN · Member since 2016 · 29 posts · 20 votes
9y
@Eric DeVito, as far as HELOC or refinance, it really depends on what you want to pay for. The interest rates will be different as well as closing cost and/or other such fees i.e. administrative. A mortgage broker should be able to help you choose which is better for you.
I'm not sure you understand the 121. It's two out of the last five before the sale of the property. So, say you owned the said property for 20 years. All that matters is that you occupied the property for 24 non consecutive months in the last 5 years. What you did with that property for the first 15 years doesn't matter. This link should lay it all out for you.
https://shar.es/1DsLJb

I hope this helps,
AA

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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Aaron Abraham Thanks for clearing that up. I fully understand now.
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Matthew A.
New Haven, CT · Member since 2016 · 90 posts · 99 votes
9y
It's scary the amount of misinformation you can get on this website or anything online. Hard to believe 10 people liked the comment about the 1031 tax exchange program. I have just updated my list by 10 people on who not to take advice from.
Yikes.
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Andrew Ware
Gardiner, ME · Member since 2015 · 190 posts · 177 votes
9y
Matthew A. Yes it's a but scary but that's why you always hear on this site to then take the information to a qualified expert (be that cpa, attorney, agent, insurance agent, etc.) The good news is on this site there are usually enough really experienced people to say no that's not right check your facts.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
Originally posted by @Eric DeVito:
@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.
Eric
you don't have that much equity in your house. based on a 30 year loan with 4% interest you still owe $200,774.06 Your math is $10,000 off! your house payment does not all go to principle some of is interest, some of it is taxes, and some (very little) is Principle. a heloc will give you a percentage of the difference between what you OWE and what you get appraised for. if it appraises at $499,000 and you owe $200,000 then you can get a % of the difference.
RR
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John CasmonPro Member
Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
9y
@Eric DeVito If it were me, I would do a HELOC, then use those funds to purchase the next home with VA/FHA financing and rent out the current home. Now, if you really want to take advantage of the capital gains tax you can move back to the previous property within the next 3 years to ensure you hit the 2-year threshold on both properties.

We went through something similar and preferred a HELOC vs. refinance as we wanted a line of credit to draw on when we needed it as opposed to just having more cash in hand. I believe closing costs were much less and interest rates were similar.
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Rommel Pascual
Real Estate Investor · Vacaville, CA · Member since 2016 · 40 posts · 15 votes
9y
Originally posted by @Eric DeVito:

@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.
I believe the florida tax exemption you are referring to are only for military member rated at 10% or more disability and its only up to $5000 in property tax and not capital gain tax. I'm no CPA but I just read it in the florida state tax website.
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
9y
@Eric DeVito
Is that chain link fence? What type of fencing is on other houses in the area? If fences are common, I might do white vinyl picket fence 3 or 4 feet high. I'd at least trim those bishes if not replace with new little bushes. "Old bushes make a house look old" I might even pain t the front door, I've done solid red or solid black, and have seen others do green, blue or other pastels.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Ralph R. I was just throwing out rough numbers but my last statement I read said I still have around 190,000 left to payoff.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@David Krulac That is an old photo David but house looks the same. I did remove some bushes that were dead. I to have put new ones in because I let another pair die cause I got lazy watering them lol. As far as the fence goes, I was thinking of switching to vinyl. Yes a lot of homes have that in area. Idk if it is worth doing right now or it can wait. It would make the home look nicer from street view.
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Brian Powell
Merritt Island, FL · Member since 2016 · 14 posts · 0 votes
9y
Eric,
I am in a similar position with a lot of equity in my primary residence looking to purchase an investment property. I called my bank today (Navy Federal) and they told me that the VA offers cash out refinancing up to 100% LTV. In my case I can most likely pull out $100k cash from the refinance and use it to purchase another property. An added bonus is that the VA rates are super low, I was quoted at 3.75% for 30 years. The only downside I saw was VA initial funding fee of 2.15 %, but that is a one time fee and sounding pretty good compared to paying 25% down for most conventional loans on investment property.
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Roy Gutierrez
Investor · Oak Park, MI · Member since 2014 · 299 posts · 47 votes
9y
If you're going to rent and it's already furnished have you thought of making it a vacation rental? More hands on but more profitable, flexibility if you need to move back in anytime.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Roy Gutierrez People don't look into Staten Island for vacation rentals. They stay in either brooklyn or Manhattan itself. Very family oriented in Staten Island.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Brian Powell That is pretty good, not sure what Helco rates are right now. Wonder how much closing cost or what other fees are involved in the VA cash out refinance though.
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Roy Gutierrez
Investor · Oak Park, MI · Member since 2014 · 299 posts · 47 votes
9y
@Eric DeVito, check airbnbn.com and homeaway.com and see the listings in your area, I have successfull vacation rentals in residential areas and people ask me, "do people really rent in xxxxxxxxx area????" basically they're quite surprised that anyone rents vacation rentals in my area, the only sure way is to list your property and see how many people inquire about booking, that's what happened to me, the amount of replies surprised me, I was planning of giving it a one month trial and it's 1 1/2 years later. I checked on airbnb and there's plenty.
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Eric DeVito
OP
Staten Island, NY · Member since 2015 · 265 posts · 59 votes
9y
@Roy Gutierrez I never used airbnb, I will check it out. Thanks.
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