Capital gains on partial release

[Grant Greenwood]

Hi all,

I have a two property portfolio under contract. The properties came in a package deal although I only intend to keep one of the two. I am confident I can find a buyer for the unwanted property but I want to make sure I am reducing my tax burden as much as possible. I think I have two options. Option one would be to assign the unwanted contract prior to closing and collect difference between the contract price I have and agreed to sales price with the assigned buyer and retain the desired property. The second option would be to close on both properties with financing. After closing find a buyer for the unwanted property and conduct a partial release with my lender.

I assume option 1 would require me to pay capital gains on the sale and I wouldn't have the ability to 1031 since I will not have owned the property longer than a year. For this reason, I think option 2 is preferrable. I have found a lender who will do a portfolio loan, partial release and no pre-payment penalty for both properties. Let's assume the unwanted property is valued at 100,000k and I sell for 100,000k to be allocated on the partial release. Would I have to pay capital gains on this sell? My assumption is that I wouldn't have to pay as the paydown is against the debt. The closing costs associated with the portfolio loan are far less than what I would pay in capital gains. 

Any guidance, expertise, and thoughts are appreciated. 
 

[Dave Foster]

@Grant Greenwood, if you assign the contract before purchase you'll pay tax on that amount.  And it will be ordinary income tax.  If you purchase the property and then sell it you will pay tax on the difference between what you paid for it and what you sold it for.  Debt and partial releases do not determine your profit.