Capital Gains Taxes vs. Tax Write-offs for Home Repairs

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Capital Gains Taxes vs. Tax Write-offs for Home Repairs

Jennifer Gardner
Investor · Member since 2019 · 41 posts · 19 votes

Hi BP community,

I know this is a CPA question but I'm hoping you can cross check my research. I'm trying to figure out how hard I'll get hit by pulling out 50k from my 1031x to make repairs on the home I'm trying to buy. Would the taxes and write-offs cancel each other out? How much do I really stand to lose? Is it worth it? For context, the house I'm trying to buy is in an incredible location, is a beautiful, highly rentable duplex that we would eventually live in and rent one unit of down the road, maybe for forever retirement. The property really feels worth it to me but I don't have the funds to make the repairs without taking it out of my 1031 exchange. I did sell my property for 60k more than anticipated and got the duplex price down to 60k less than I had originally offered and seller originally wanted. I'm just concerned about losing money in capital gains taxes. 

Thanks for your input and insight!

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y

    You're correct that this is a CPA question, and you should ask a CPA. Please don't take this as gospel or tax advice. I am not a CPA. 

    That being said...

    For most taxpayers, long term capital gains tax is 15% (you can look up the actual rates here). 

    If you take $50k in boot from your 1031 exchange, that will be a $7500 tax bill due when you file your income taxes. So you may want to compare this to other ways of financing the repairs and figure out what makes the most sense in terms of the cost of capital.

    The repairs you make to the new property will certainly be written off, in the sense that they are either repair expenses in the year they occur, or depreciable capital expenditures that you will depreciate over time (you may also want to ask your CPA about cost segregation for the repairs).

    But paying tax on the boot from the 1031 exchange, and paying for repairs on another property, are unrelated events. They don't directly cancel each other out. 

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  • Jennifer Gardner
    OP
    Investor · Member since 2019 · 41 posts · 19 votes
    4y

    @Jeff Copeland really appreciate you taking the time to share your knowledge! It's just good to hear another perspective. Thanks so much for not just ending your comment with yes this is a CPA question! Take care and thanks again :) 

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