1031 fees vs taking tax hit?

6 Replies

Paid $100,000 in 2012 for this rental to kids, they are moving. If we sell for about $200,000, we are in 15% bracket. Married $77000 income approx. What's better choice, pay the cap. Gain tax? And be done with it. Or, pay the fees to lawyers, real estate, intermediary ,etc,etc?? What would total amount of fees be doing 1031..or just pay tax. 

hope I got my point across.  Not in millions here. Lol.

@Peter Brisette welcome to BP! I don't know what 1031 fees may cost, but @Yonah Weiss might.

Also, note that if you already have $77k in income and add $100k plus depreciation recapture onto that, you'd likely be in a higher tax bracket.

Lastly, don't let the tax tail wag the investment dog. If you find a good investment, why not defer taxes (I assume it's worth the fees because a lot of people do it, but you know what happens when you assume). And if you do not find a good investment within the limited time frame, then it should be no question to pay the cap gains tax and reinvest into an appropriate investment when an opportunity comes.

Good luck!

@Peter Brisette , You're accountant will have to give you an exact number but hand grenade math will have you with a capital gain of around $80K after selling costs which would be at 15% fed + whatever state rate for your locale - Ballpark $ 12K fed tax.

The hidden bugaboo is gonna be depreciation recapture which should be at 25% - ball park it at maybe another $7K of tax.  So a total federal tax bill of 19K plus state.  

Either way you'll be selling your property with all the usual professionals.  So the only added expense for the 1031 will be the required qualified intermediary.  $750 - $1000 is average.  Here's an article we wrote for BP on the typical cost of a 1031 - https://www.biggerpockets.com/blog/how-much-does-a-1031-exchange-cost.

No one ever went broke paying tax.  But the 1031 looks like it would save you around $18K immediately.  And the real power of the 1031 is your ability to use that $18K indefinitely to generate income to go into your pocket instead of the govt coffers.

@Mark Creason abvolutely right.  But that sucker is floating around between Congress and the White House like a beach ball at a Dead concert.   I don't have a clue where it is right now.  

@Mark Creason I still think that puts him below the 3.8% Medicare Surcharge threshold. But either way- I agree with @Dave Foster the math certainly makes sense if he does have a new investment in mind. I would much rather pay myself (with cash flow and future appreciation on that $18k) than pay the IRS. Just my 2 cents.  

@Peter Brisette

based on the figures that you provided i would go with the 1031 exchange.

The 1031 exchange fees will be about $750 - $1000 compared to atleast $10,000 in federal/state taxes that you would be paying. 
You should consult with your accountant on what the estimated tax would be as a result of the sale for a more concrete answer.