Capital Gains Tax - Bought less than a year ago and need to sell

10 Replies

Hi all! CAPITAL GAINS TAX — NEED HELP! 🙏

I bought my first investment property in August 2018. paid $152k and have put in about $20k in renovations. It's currently rented for $1600 a month and I have it listed for $252k (comps are at like $230k.) So less than a year.... (Miami, FL)

My plan was to hold for a few years while it's rented out BUT my situation has changed and I need my mom closer due to health reasons. I have decided to sell so I could buy her a place close to me. 

If I sell my property and buy her a place, what are the rules associated to avoid capital gains tax? Time frame? Can it even be 100% avoided? Is there a calculator I can find somewhere to help figure out the tax? Or as long as I buy right away, I'm good? 🤔

Any info would be very much appreciated! You guys rock! I will get back on the investment game once mom is all set! 

— Ashley from Miami 🌴

Hello,

Which property did you buy? which sector of Miami? I live in Miami and Im starting my investor career and would like to connect with people with experience to educate myself. Thank you.

@Juan Ardila nice connecting with you! I bought in the "upper east side" area / 78th street off of Biscayne Blvd. great up and coming area. I was ballsy and did sight unseen auction but i knew the building and that all units had a view. Can't go wrong with a direct water view in my eyes. 

@Ashley Davis A 1031 exchange is probably your best bet. You'll have 180 days to close on a new property after you sell the first one and can avoid paying capital gain taxes. A title company might be able to help you with this process from beginning to end. Good luck!

@Ashley Davis , I'll reach out via pm with a link to a calculator that you can play with.   A 1031 exchange allows you to defer indefinitely the tax on the gain.  But there's a couple quirks that you'll need to pay attention to.  First is must be property that you intended to hold for productive use and not property you intended to sell.  There is no statutory holding period but most folks feel that anything more than a year if fine.  But there could always be situations where a shorter or longer hold period might be appropriate.  You mentioned your intent to hold above.  So as long as you feel good with that explanation and how you'd document it the 1031 would be appropriate.

Second bugaboo - Your replacement property must also be property that you intend to hold for productive use.  So simply buying a property to let your mom live in would not qualify.  However buying a rental property that you lease to  your mom as an arms length transaction might be fine if you actually set up a lease, collected rent and reported it (you can gift it back to her legally within the federal limits so it washes).

There are some timelines you do have to follow.  But the above two issues you'll need to sort through first to see if you can make it work.

@Dave Foster do you know of a way to avoid short term capitol gains for flippers?  Every so often a flip house is offered to me, but I hate thinking about the taxes, and its not worth it to do the work to loose the profit in taxes.   And these houses are not good for rentals--either location, or too upscale for the type of renters that are available, etc.

THANK YOU for the wisdom! @Dave Foster  @Wayne Brooks  @Jack V. Ospina  

I know it's not an ideal situation but I do NOT have a mortgage on the property and having my mom close is more important right now than maximizing profit. I'll get back in the game soon!  

Some people are saying "defer" and some people are saying "avoid" in terms of the taxes. Just to confirm, I can 100% avoid the tax with the 1031-exchange?

1031 Exchange / to qualify - Need to buy new apt as a rental property that I would lease her as an arms-length transaction.. must actually set up a lease, collect rent and report it. ✔️

Time Frame - 180 days to close on a new property after you sell the first one to avoid paying capital gain taxes. Talk to a title company. ✔️

Am I missing anything? 

What about the $20k in reno costs? Is that added to the price I paid? So $172k (ish) rather than the purchase price of $152k? Gains would be = $70,555 (I just reduced the price today by $10k.. List price now $242,555.... so $242,555 - $152k - 20k repairs?) Or do I not even need to worry about any of this as long as I buy within 180 days of closing, I do not have to pay capital gains tax? 

Sorry for the repetitiveness, just want to make sure I got it. All feedback appreciated! 

THANK YOU!

@Ashley Davis No.....

A 1031 Defers the tax until you sell the replacement property, then the tax becomes due. 

You Can avoid tax altogether with a 1031 if you:

do 1031’s until you die, never “sell”.

The only way to Avoid/eliminate tax is if the house was your primary residence for two years, etc....avoid tax on gains up to $250k single, $500k married. 

@Ashley Davis Your capital improvements increase your basis so if you sell without a 1031 they would indeed reduce your gain and the associated tax.  The 1031 defers the tax indefinitely (until you sell without doing another 1031).  Is that avoidance - I would think so.  Is it elimination - no it is not.  The only two ways to eliminate capital gains on real estate are 

1. To die and your heirs get the property tax free.

2. To turn a property into your primary residence.  After the appropriate time lines and residency are met you get to prorate the gain between time of residency and time as investment.  So you can eliminate a portion (sometimes a significant portion) of the gain.

Note that 1031 isn't just that you must sell and buy within the time lines.  You also have to have a 3rd party qualified intermediary document that process and you cannot touch the proceeds in between the sale and purchase.  The IRS is rather stickly about the 1031 process.