First time selling a nonconforming triplex - help!
We’ve been renting out a single family home for the last year that is renovated to be a triplex. We’ve made a great return so far but the city has asked us to move back in to continue renting out the ADUs, so we’re opting to sell instead and need it sold by the end of October. This is our first time selling a property so I have a lot of questions:
1. Any recommendations on who to sell through? There are services like Homey and Open Door that claim to charge less than 3% but I’m skeptical they’ll be as good as a regular realtor.
2. In order to avoid capital gains tax, do we need to have the property under an llc to utilize the 1031 exchange?
3. All 3 units are fully occupied right now, so though we will ask tenants to keep their space clean for showings, the rooms won’t be properly staged. Should I worry about the appeal of the house when it’s being occupied? Also, how soon do you recommend I let the tenants know that we’ll be selling the house?
Any other advice for a first time seller would be greatly appreciated!
As long as you utilize the proper channels for the 1031 exchange you should not need the property to be in an LLC. @Dave Foster might be able to clarify but I have seen plenty of 1031 exchanges from personal names as well as from LLCs.
Once you know for sure you are selling and have a listing date set with your realtor I would notify the tenants and discuss how you will coordinate showings. Some agents and sellers opt to only allow showings once under contract, your agent may have some input here as well. If it's occupied with tenants the next buyer/owner will likely inherit the leases (depending on your specific state law) so there is an expectation it won't be perfectly staged.
Good luck!
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@Bryan Noth, Thanks for that kind shout out. @Becca Pearson, any tax paying entity can do a 1031 exchange. The IRS only cares that it is investment property. And that the tax payer for the old property remains the same tax payer for the new property.
Since this was once your primary residence you might be eligible for the primary residence exclusion on the portion you lived in. You must have lived in that part for 2 out of the 5 years prior to selling it. You would get the first $500K of profit tax free if married. And the profit allocated to the other units would be eligible for tax deferral in a 1031 exchange.
Best of both worlds.
Quote from @Dave Foster:
, Thanks for that kind shout out. @Becca Pearson, any tax paying entity can do a 1031 exchange. The IRS only cares that it is investment property. And that the tax payer for the old property remains the same tax payer for the new property.
Since this was once your primary residence you might be eligible for the primary residence exclusion on the portion you lived in. You must have lived in that part for 2 out of the 5 years prior to selling it. You would get the first $500K of profit tax free if married. And the profit allocated to the other units would be eligible for tax deferral in a 1031 exchange.
Best of both worlds.
Thanks for your help Dave! Unfortunately, we only lived there for 9 months before moving so we could rent it out and do another house hack. But I will keep this in mind for the future!
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@Becca Pearson, And that's when the 1031 exchange is worth it's weight in gold (literally). You'll be able to indefinitely defer all tax.
can you wait until tenants have vacated? No investor wants 3 sets of legacy tenants and their leases, and it wont show well with tenants stuff strewn around, damage from animals, bad paint condition, etc. And tenants never cooperagte with live showings. Unless you can sell it "as is where is with all faults" and take a big discount. Or sell it to O/O who will live there. The fact that its a rental has nothing to do with your qualifying for the 1031. I dont think anyway.