selling 2 rental properties to purchase unimproved land

Member since 2018 · 3 posts · 2 votes

I am selling 2 rental units to purchase unimproved land to be used as my future primary residence. In addition, I currently have my existing primary residence on the market as well. What are my best options to avoid capital gains tax?

A build to suit exchange? My combined proceeds from the 2 rental units would be approx. $250,000+, The land purchase would purchased for $260,000.

Thank you,

Mike

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

If you've occupied your current primary residence for 2/5 last years the gain on the sale of that property will be non-taxable.

Selling the two rentals is trickier. The gain is taxable, and depreciation recapture is taxable at up to 25%.

You could not do a 1031 exchange on the land because it's intended purpose isn't income producing- it's for your primary residence.

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
8y
If you've occupied your current primary residence for 2/5 last years the gain on the sale of that property will be non-taxable.
Selling the two rentals is trickier. The gain is taxable, and depreciation recapture is taxable at up to 25%.
You could not do a 1031 exchange on the land because it's intended purpose isn't income producing- it's for your primary residence.
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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
8y
What’s the likely gain on the rentals / what is their cost basis?
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Vinay H.
Cambridge, MA · Member since 2017 · 268 posts · 247 votes
8y
Well your house is on the market. So you should be able to get a construction loan at 80% ltv to buy land and finance construction. I talked to many banks and they are willing ti do that. Slightly higher interest and fees than just a regular mortgage. Why do you want to sell your rental unless you want to get out of business? The other downside is the tax implications of selling. If you want to make all cash offer for land you could pull equity from those units.
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Grant Rothenburger
Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
8y
@Michael McInerny
I like what @Vinay H. suggested, can you pull equity out of the rentals?
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Michael McInerny
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Member since 2018 · 3 posts · 2 votes
8y
Thank you for the responses.
What if the property we are buying has avocado producing incoming? Is there a grey area?
Already going into escrow on both rentals all cash offers - I'll clear approx. $250,000. Cost Basis combined $345,000 - Sale combined $480,000 -
Can I do a Build to Suit Exchange to purchase property?
Reason - wife is done w/ tract home living - liquidate all - buy her dream land and build our home now w/ late research! AGGHH!!
Primary residence slower to sell.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
8y
Originally posted by @Michael McInerny:

Thank you for the responses.
What if the property we are buying has avocado producing incoming? Is there a grey area?
Already going into escrow on both rentals all cash offers - I'll clear approx. $250,000. Cost Basis combined $345,000 - Sale combined $480,000 -
Can I do a Build to Suit Exchange to purchase property?
Reason - wife is done w/ tract home living - liquidate all - buy her dream land and build our home now w/ late research! AGGHH!!
Primary residence slower to sell.
If you're already in escrow it's too late to do a 1031 either way. It needs to be setup prior to selling.
You're paying Capital gains on those rental sales - is the $345 the adjusted basis reduced from depreciation? Or just original purchase prices? or?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Michael McInerny, Finally enough details emerge!! I think you might be able to pull off a build to suit. What I'm hearing is that you are selling two investment lots and want to exchange into an avocado farm and want to make some improvements to that productive farm. That would certainly work.
In fact what I'm hearing is that the two investment properties and the land will be about a perfect exchange. You are under no obligation to use the proceeds from your primary sale for any particular reason. They are tax free.
So why don't you simply exchange the two buildings for the investment productive land. And then at your leisure improve the farm with proceeds from your primary sale. There's absolutely nothing wrong with that. As long as you're simply in the middle of escrow and title hasn't conveyed yet you've got time.
Keeping it simple.
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Michael McInerny
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Member since 2018 · 3 posts · 2 votes
8y
Dave,
You are the man! That's what I needed to hear .
Thank you,
Mike
Thank you all for your insight!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Michael McInerny I know a good QI if you need one ;)
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