How to avoid capital gains taxes on 150k

Dave Toelkes
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
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@Cesar Ramirez,
To avoid the capital gains taxes -- don't sell.
A1031 exchange can defer (not avoid) the taxes indefinitely until you sell the replacement property in a taxable sale.
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Cesar Ramirez
OP
Riverside, CA · Member since 2016 · 88 posts · 3 votes
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Dave Toelkes I understand it's only a deferment of taxes. But my next question would be if I ended selling my next property would I get taxed on the deffered taxes at that point ?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
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@Cesar Ramirez, if you sell without completing another 1031 exchange you will pay tax on the entire amount of gain which will have been adjusted in your cost basis on the new property with form 8824 that your accountant files.
If you sell and complete another 1031 you will again defer tax. The end game could be continuing to defer till death and the gain disappears with the step up basis to your heirs. It could be that you 1031 into passive 1031 investments. It could be that you end up converting a 1031 property into your primary residence. Look longer term.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
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Hi @Cesar Ramirez,
You can continue to 1031 Exchange throughout your life so that you always defer the taxes. Your heirs will receive a step up in cost basis so that you will never pay the taxes. So, the 1031 Exchange is a tax-deferred strategy but it can become a tax free strategy if you continue to 1031 Exchange indefinitely. It all depends on what your goals and objectives are.
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Tom Chen
Investor · Houston, TX · Member since 2016 · 31 posts · 5 votes
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Another thing to note is that your "gain" will be taxed at different rates due to 1250 recapture (taxed at 25%). Not all of it will be capital gains eligible for the 15%/20% rates.
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Deanna O.
Rental Property Investor · San Diego, CA · Member since 2010 · 377 posts · 314 votes
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Depreciation is the potential Gotcha, since it is which you SHOULD have depreciated while it was a rental, whether you did so or not).
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Cesar Ramirez
OP
Riverside, CA · Member since 2016 · 88 posts · 3 votes
10y
Well this past tax year was the only year I added the depreciation on the house on the taxes.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
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The IRS will make you "recapture" the depreciation even if you didn't deduct it as an expense for the rental.

Kinda a "your loss- why didn't you do that" situation unfortunately.
So- depreciation recapture on the entire rental history will happen at 1250 rates unfortunately.
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Cesar Ramirez
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Riverside, CA · Member since 2016 · 88 posts · 3 votes
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Natalie Kolodij yea it was my bad I wasn't aware of the depreciation and that I was able to get that taxed even tho I've had this house for 6 years and my primary for 3 . I consider my self anew investor. I've learn so much in this last 40 or so days it's amazing
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
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@Cesar Ramirez
Earlier you mentioned you lived in it for one...if you lived in it for 3 it may qualify for gain exclusion. Can you please post when you purchased and when you move out/began renting?
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Cesar Ramirez
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Riverside, CA · Member since 2016 · 88 posts · 3 votes
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@Natalie Kolodij the property im selling I lived in it for 1 year and rented it for 5. Then i also have my primary that I been living in the last three years
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Victor N.
Investor · Wellington, KS · Member since 2016 · 256 posts · 188 votes
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Consult a tax advisor asap. You can still use some of the depreciation for 2013, 2014 and 2015. You will be recapturing the depreciation at sale even if you didn't claim it in the first place. So claiming what you can now will only help you.
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Natalie KolodijBusiness Member
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@Victor N. I don't believe there is a way for him to deduct the depreciation now without amending those returns.
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Victor N.
Investor · Wellington, KS · Member since 2016 · 256 posts · 188 votes
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Actually, you can file a change of accounting method form 3115 to change from an impermissible accounting method of not deducting depreciation to a permissible method. As part of the change your advisor will calculate a section 481 (a) adjustment to claim the missed depreciation. Where the taxpayer failed to deduct depreciation two years in a row, they establish an accounting method and no amended returns are required or appropriate.
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
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Where I come from (not USA), a maximum of 25% tax on your PROFIT, regardless of your other income, would be considered a gift (almost). Just make sure all allowable expenses ARE deducted!
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
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One option would be to cash out refinance, keep the asset, but pull some equity out to redeploy, tax free. You are increasing your leverage, and there are some risks to be considered in doing that, as well as the affects on your cashflow, but if you are looking for options to tap some equity tax free that is one option.
Also, be sure to consider the options of just leaving it alone and the option of just selling and paying the taxes to compare and fully consider all your options. Tax savings are great when you can get them by doing something you were going to do anyhow, but we must be careful to never let the tax tail wag the investment dog.
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Dave Toelkes
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
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In addition to amended prior year tax returns, there is a form you can attach to your next tax return that will let you "catch up" on all the depreciation you failed to take. Your CPA should be able to help you with this. Ask your CPA about Form 3115.
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