Selling First 3 Unit FHA after 2 years. Taxes?

Question

I was 19 when I joined bigger pockets and gained so much knowledge. To keep it short. I worked etc. (W2 job) eventually found a good deal. I bought it for 220k. It can sell now for about 400k. I lived in one the units for 2 years and rented out the others. My understanding was the gain was tax free if I lived in the house for 2 years out of the 5 for FHA. Now I have been told only 1/3 of it would be tax free. The rest of the gain would be taxed. So confused help. BTW I do not mind paying the taxes but it is a BIG CHUNK! Thanks BIGGER POCKETS !

Wayne Brooks · Answer

No way....it’s like you own 2 separate properties. 1) the one you live in as an owner occupied SFR 2) the other 2 units are treated like a separate investment duplex.

Wayne Brooks · Answer

@Kevin Mejia You get the 121 exclusion on 1/3 (assuming all units are the same) and regular cap gains/depreciation on the other 2.
You take take the exemption on 1/3 of the gain and 1031 the gain from the other 2 into an investment property.

Mark H. Porter · Answer

Or...you could roll ALL the money you leave with, multiply by 4, and go shopping for a lot more units and defer the gains for sometime in the future. Search in “1031” or talk to @Dave Foster

Dave Foster · Answer

@Kevin Mejia, Unless you were simply renting out spaces inside the residence you lived in you actually have to equivalent of two properties as @Wayne Brooks said.

The unit you live in qualifies for the tax free exemption.

The units you rent qualify for a 1031 exchange which would defer. indefinitely all tax and depreciation recapture.

You get to use both. At the sale some of the money will go directly to you. It is tax free. The rest will go into your 1031 exchange account and you will reinvest it in new investment real estate.

This really is a great opportunity for you to put some tax free dollars in your pocket and use the rest to build your investment portfolio. And maybe one of your purchases is a multi unit property that you could live in one unit and rent the rest out. And do the same thing all over again!!!

Paul Moore · Answer

Great advice above, @Kevin Mejia. I've talked to quite a few investors in the last few months who are stuck in this situation. I am getting ready to sell a large asset and have decided to either (1) do a 1031 exchange into an underpriced off-market recession-resistant asset (extremely hard to find!) or (2) invest in a DST (Delaware Statutory Trust) -- these vehicles accept 1031 funds on a fractional basis, or (3) invest in an asset in the same calendar year with high bonus depreciation (which is typically accessed/proven through a cost segregation study).

You could reinvest the proceeds from the part you lived in into a highly depreciating asset (with a lot of same-year bonus depreciation) and reinvest the other 2/3rds through a 1031 exchange. If you are a QREP (qualified real estate professional), you will have more flexibility matching your losses and gains. Good Luck!

Basit Siddiqi · Answer

@Kevin MejiaThe best one who will be able to answer your question is your accountant as he/she would know what type of property it is and how much depreciation was taken on the property.It sounds like this is a 3 unit property as you came up with a 1/3 ratio.If you buy a triplex, live in one of the 3 units and then sell. You would be responsible for paying tax on the 2/3 units you didn't live in. In addition, if you converted your personal residence into a rental, you may be subject to depreciation recapture on that unit.

Kevin Mejia · Answer

@Kevin Mejia

Thank you guys so much !!! I’m learning so much! But I think I’m most likely going to take the 1031 advice and take some tax free

Bob Norton · Answer

@Kevin Mejia You get the exclusion on the entire property; however, you will have to pay taxes on the depreciation recapture.

Selling First 3 Unit FHA after 2 years. Taxes?

Selling First 3 Unit FHA after 2 years. Taxes?

Most Popular Reply

8 Replies