1031 exchange or take the capital gains

7 Replies

First, allow me to introduce myself. My name is Shane Griffin and I am an investor currently living in Bryan, Texas. I have one rental property (which I will discuss below) and I am currently living in a fix and flip while working a full time job. I have been floating around the forums/podcasts for a year or so learning from each of you.

I am about to sell one of my rental properties and trying to decide if going with a 1031 exchange would benefit me or if it would be wiser to just pay the taxes now. I purchased this property in June 2013 as my primary residence and turned it into a rental in 2014.

See below numbers.

Original Purchase price (2013) - $134,900

Improvements - $12,000

Sales Price (FSBO) - $157,000

2014 Depreciation - $3,350

~$1500 - 1031 Exchange - Differ capital gains and depreciation recapture but pay an intermediary fees

$2200 - Taxes from sell. $838 (Depreciation recapture $3350 @ 25%) $1965 (Capital gains Realized gain ($13,450) - Depreciation ($3350) - Fees at closing ($1000 owners title insurance) @ 15%)

My questions are:

1. If I am selling the property this June, will I depreciate the home on my 2015 taxes for half of the year? If so, this would increase the depreciation recapture to $1260 ($5025 @ 25%) and total taxes to $2621

2. If this were your property what would you do? Am I missing anything in my calculations?

Thanks in advance,

Shane Griffin

It probably isn't worth $1500 to defer $2000 to $2600 in taxes.  The 2015 depreciation recapture is a wash, since you would deduct the depreciation from rental income.

Even if you go FSBO, you probably will have to pay a buyers agent or at the very least provide some closing assistance - so you could be looking at an even smaller number for your final capital gains.

Also a 1031 will limit your flexibility in acquiring your next property.

State income taxes sometimes do not recognize the 1031 exchange. For example, in my state PA, there is no deferral of the capital gains from a 1031 exchange when filing the PA state income tax return. 

Jesse - The current tenant is the prospective buyer and I would not have the buyer's agent fees. Thank you for your reply.

Steve - Luckily for me I live in Texas where there are no state income taxes.

Shane, most 1031 Exchange fees for one sale and one purchase are only around $800.00, but I don't think the amount of gain you are talking about makes sense.  I would sell and pay the taxes and then decide what to do and/or reinvest in later on your own time line and not those of the 1031 Exchange.

@Shane Griffin

 That fee seems very high.  However, you may want to run an analysis on that fix n flip  you're living in. If you don't do a 1031 on your rental property you'll have a little tax bill but maybe the cash generated allows you to extend your stay in the fix n flip so it goes past the two year mark in which case you get to enjoy the gain from that (250K if single, 500K if married) tax free.   Use some of what would have been the 1031 to purchase another fix n flip that you move into next.  Live in it two years and once again the gain is tax free. Keeping your sale out of the 1031 frees it up for you to use however you want.  Put that into your equation.

Originally posted by @Bill Exeter :

Shane, most 1031 Exchange fees for one sale and one purchase are only around $800.00, but I don't think the amount of gain you are talking about makes sense.  I would sell and pay the taxes and then decide what to do and/or reinvest in later on your own time line and not those of the 1031 Exchange.

Thanks Bill for your input. I had actually looked at your website for pricing reference and accidently added in the fee for an additional house. I will factor in ~$800 and see how I feel.

Originally posted by @Dave Foster :

@Shane Griffin

 That fee seems very high.  However, you may want to run an analysis on that fix n flip  you're living in. If you don't do a 1031 on your rental property you'll have a little tax bill but maybe the cash generated allows you to extend your stay in the fix n flip so it goes past the two year mark in which case you get to enjoy the gain from that (250K if single, 500K if married) tax free.   Use some of what would have been the 1031 to purchase another fix n flip that you move into next.  Live in it two years and once again the gain is tax free. Keeping your sale out of the 1031 frees it up for you to use however you want.  Put that into your equation.

Dave -Thanks for your comments.

See my response to Bill above. This was not a quote from any specific company, just an oversight on my part.

It seems like the timeframe required from a 1031 is a battle many investors face. I'll take that and the above comments into consideration. Thanks again.

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