What am I left with after I sell or exchange my house?

Question

Hi Team,

I'm about to sell or do a 1031 on a home and I can't get a straight answer on what I'll be left with afterwards.  I definitely don't want to be blindsided come tax season.  I owe 200k and will be selling for 300k.  Could someone smarter than me explain/breakdown what I'll be left with to either re-invest (in the case of a 1031) or pocket (if I decide to go that route)?  What's the cost break down?  The property has been a rental for 15 years and I'll be using a real estate agent.  I've re-financed 3 times.  I use depreciation as a tax right off every year.

1. If I sell the house and pocket the cash what will I walk away with and what kind of taxes can I expect to pay?  What's the cost beak down?  When do I pay those taxes?  Do I have to pay for all the years of depreciation?

2. If I do a 1031 exchange, how much will I have to re-invest?  How do I structure the deal to be a 1031 exchange and at what point do I need to address the sale from a tax perspective?

You rock for giving the clueless a clue.  Thank you for your help in advance.

Tobey

Tobey Humphries · Answer

Thank you Dave!  Good information and very helpful.

Dave Foster · Answer

Hi Tobey,

The exact numbers are a little elusive because many of them are dependent on your filing bracket purchase price and some other factors.  Gain will be the difference between your net sales price and your adjusted cost basis.

Your adjusted cost basis is your purchase price plus capital improvements and unrealized expenses minus depreciation.  So if you bought it 15 years ago for $150K and had put 20K of improvements into it and it have taken 60K in depreciation then your adjusted cost basis is roughly $190K.  Sell that for 300K net sale and your gain is $110.  But there's tons of variables that only you and your accountant know to make that analysis valid.

What is the tax on $110K in gain.  That depends.  The recapture of depreciation will be 25%. Fed capital gain could be 15 - 20% State tax for CA could be up to 13.3%  So you can probably figure a ball park average of 25%ish.  Again, lots of moving parts.  Your accountant will have this number at their fingertip.

If you do a 1031 exchange you can defer the tax on  all of that gain and depreciation recapture.  The requirements to defer all tax are that you purchase at least as much as your net sale (contract price minus normal closing costs) and you use all of the net proceeds of the sale (net sales price minus mortgage pay off) in the next purchase or purchases.  In your cash you would need to purchase at least $300K ish  and use all of the $100K ish in proceeds to do that.

You can purchase less than you sell and you can take cash out of the 1031 but the IRS views that as taking profit so you would pay tax on that amount but would shelter the remaining profit in the 1031.

Your accountant is a key player here for you to understand the true nature of your tax situation.  But also remember that a 1031 is not DIY.  You must have a QI in place prior to the closing of your sale.