Rental Property Sale + 6 Figure Capital Gain = Huge Tax Liability

6 Replies

I've got a good/bad tax problem and I'm looking for some advice:

My wife and I bought a rental property in 2015 for $275k (no LLC, purchased directly in our name, so technically a partnership). We put about $25k into it to get it reparied and up to speed. It was a great property for us and it was CF positive from day one (even with the repairs). However, we just sold it about 2 months ago when another investor offered us $430k for it!

So, the good news is that after all of our expenses, we have ~$125k gain, the bad news is that we have a ~$125k gain.  


I've been working with a CPA for some time, but their recommendation was to just pay the tax on the gain, donate, or sell some stocks at a loss. I thought they'd recommend something like - create an LLC and reinvest it into another property and you can offset that gain with the amount you pay down, or go buy a car and write that off, or something of that sort.

Do you have a recommendation on how we can reduce our tax liability for this scenario?

Thanks for any advice

Pete

Well, the only way I know of to avoid that tax is with a 1031 exchange and you had to have found a new place within 45 days of selling the old one, so "2 months ago" was too long to wait.

Hopefully, a RE CPA will reply with a better answer.  Good luck.

Any annual gains above $75k I make sure to 1031 exchange if tax deferral is my goal.  On one of my bigger fatties (over $500) I may do a monetized installment sale.

The gain shouldn't have been a surprise.  Has the transaction closed or can you still elect to do something like an exchange @Peter Mikhjian

Unfortunately your accountant is probably right. With taxes you have to plan ahead and very rarely can you “go back” and mitigate a tax liability.

You can likely reduce your tax liability by a small amount by maxing out an IRA contribution and max out any remaining 401k contributions for the year, if you have one; however, this will likely not do much to reduce your overall liability. Your accounts idea about making a charitable contribution will also help but will likely reduce some of your net. A couple great positives if you choose to go that route would be giving less to the IRS and knowing that the money you donated went to a great cause. I would recommend looking for some smaller, local charities that put more of your dollars to work actually helping people than the national charities do while making a big impact. I’m sure there are a few that could really use that money, especially with the holidays coming up.

It's a good problem to have for sure, nice on the 500!  

I looked at doing a 1031, but I couldn't find a property that made sense to me.  No need to buy something I wasn't sure on.  So, that door is closed already.

I'm not a CPA, but wouldn't I be able to 'buy a car' and then state that the car is for real estate use? If I had an LLC, I would assume that would be fine, but since it's a partnership, it gets a little muddled.

Your accountant is correct.  At this point, your best hope is to sell other items at a capital loss to offset the gain.  Tax strategy rarely works in retrospective - it's all about planning.

Congratulations on the profits - it's still a win, even with the tax issue.

@Peter Mikhjian

You can buy a car, but the deduction will be limited. You will have to figure out business use percentage and depreciate the car, and regular car have strict limits to the depreciation. 

You could potentially buy and deduct a large truck, but you will need to show that it is used mostly (or exclusively) for real estate business. And it has to make sense. Buying a $50k truck to manage couple houses just does not make economical sense.

Even if you could somehow pull that off - this strategy will backfire later on, when you sell the truck. The entire amount will become taxable.

In the future, keep in mind that a 1031 has to start before the property is sold, not after. 

Also, I commend you for making a VERY smart business decision and NOT buying a bad investment, just to save on taxes. Thumbs up!

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