I want to sell a piece of rental property in Colorado and buy more rental property in North Carolina.
How do I keep from paying capital gains tax?
Can I use some of the profit to pay down the mortgage on other rental property I own?
I'm not looking to cash out. I just want to swap my property in Colorado for more property in North Carolina.
You can do what's called a 1031. It won't save you from taxes, but will defer them. Simple way to look at it is that you need to buy "like kind" and trade up meaning you must buy real estate and the total of your new purchases must cost at least the value of what you had before, but usually more. There are other stipulations which you can search for around the forum, but these are the basics.
I suggest looking into using a 1031 Tax deferred exchange when selling your Colorado property.
There are some rules you must follow when utilizing this strategy, such as the replacement property must be "Like-Kind", the replacement property should be of equal or greater value, and a strict identification window of 45 days to identify your next purchase, so you may want to have another property already lined up.
@Robert Thompson you asked about using the proceeds to pay down other mortgages. You will pay capital gains taxes on that money as well as taxes on recaptured depreciation. It's just like putting the money in your pocket and spending it on a fancy car. The 1031 has strict rules that must be followed. Technically it's not hard but it's the IRS so you have to follow the rules exactly.
@Robert Thompson I've posted on this topic before a couple of times, and my experience is that in the vast majority of cases, people that do sell assets to go buy different ones elsewhere, find that they made no economic headway as they forget to calculate the costs of the sales of the current assets to free up the capital needed to acquire the new ones. You are also killing an existing cash flow, appreciation and depreciation benefits stream when you sell. I use the example of selling your fish, to buy worms, to go fishing. I'd be interested in knowing the "why?" behind your plan to divest in REI in Colorado in order to invest in REI in NC. I see you are in NC, so I presume that has something to do with it.
Another factor in my plans to sell the house in Colorado and buy more rental property in NC.
I bought the house in CO in 89. It was my primary residence until 2012 when it became rental property?
Sadly you're past the classification of it being your primary. It's 2 of the past 5 years. 2015 would have been your last opportunity to do that which would have saved you the issue of avoiding the cap gains.
Hey @Robert Thompson
Like Charlie said, it might be better idea to do a cash out refinance or HELOC and then use that cash to put a downpayment on the new house. You should be able to qualify for a new mortgage since you have rented the house out for the last two years because you can use that rental income as personal income.
What kind of house are you looking to buy in North Carolina? is it a great deal? is the Colorado one doing well or poorly?
I did a 1031 exchange last year. I sold an underperforming rental to invest in a pair that showed much better cash flow. A couple of considerations for the OP:
1. You can defer the capital gains tax with a 1031 exchange, but you will be hit with 25% depreciation recapture tax. Google "depreciation recapture" for more details, factor that cost into your decision making.
2. If you sell a rental with a mortgage or other secured loan, you'll have to purchase your replacement property with a mortgage or pay tax on the reduction in liability. Google "mortgage boot" for more information.
3. There are costs will selling, the 1031 exchange, the mortgage on the new property. Make sure you're clear on all these costs when analysing your options. As others have stated, it might make more sense to borrow on the CO rental to fund the new NC purchase.
If you do a 1031 exchange, make sure you do it correctly. Contact your CPA and line up a "qualified intermediary". If you make one small mistake, you'll have to pay tax on those capital gains.
I hope that helps.