Selling rental - capital gains tax?

Question

We bought a duplex 7 months ago intending to rent it out. It was bought for cash from our home equity loan. We have now rehabbed the lower unit and found a tenant. They are moving in in 2 weeks. The upper unit will be move-in ready in 2 weeks.

Now, we are thinking of selling the property and buying another that just popped up on the market right next to our other property to consolidate our properties closer to each other.

Purchase price: ~$20K

Repairs/expenses: ~$5K

Sale price: $40K

Profit/gain: $15K

How will the profit of $15K be taxed? Or will we be taxed on the entire sale price of $40K?

If only the profit is taxed, does the $15K get taxed separately from our other income, or does it all add together with expenses to determine the tax % amount?

Will the tax be short-term capital gains tax or any other kind of tax?

Thank you!

Natalie Kolodij · Answer

1031 doesn't make sense at all for this situation.

$15k is assuming no other costs.

No purchase or selling costs related to this property.

If it is indeed $15k it will be ST capital gain, and as mentioned above it's based on your ordinary income tax bracket.

Account Closed · Answer

You really need to speak with a good CPA. Do not trust an accountant. It looks to me like you can do a tax-free 1031 Exchange, but the time period between your sale, identifying a property to purchase and time period to close is critical.

I don't know anything about the cost for a CPA to handle a 1031 Exchange and the tax for $15k may not be worth paying money to salvage. If you are in the 20% income tax bracket you may not have to pay any money if you have any write-offs or real estate depreciation.

Kat Rathell · Answer

Thank you, everybody, for sharing your expertise And advice!

It really helped put things in perspective.

For now, we decided against selling, we are renting it out at the moment, and will refinance our other, more established, investment property, for extra cash.

Ashish Acharya · Answer

Not big enough to defer with 1031.

Your capital gain tax might be zero if your other W-2 income is already below 80ish thousand dollar.

Bob Norton · Answer

@Kat Rathell Will your existing duplex cash flow? Have you considered refinancing it to pull out your cash, so that you can keep it, and use your cash/HELOC to fund the next one?

Since you have owned the property for less than 1 year, you will taxed at regular tax rates. If you can hold it another 5 months, then sell it, you will pay capital gains rates. Depending upon your tax situation, you may even qualify for the zero capital gains rate.

A 1031 exchange is an option, but as @Bill Brandt pointed out you'd be paying high fees to delay a small gain.

You should definitely review your situation with your CPA.

Bill B. · Answer

I BELIEVE it will be added to your regular income and taxed as such because you didn’t hold it for a year to qualify for the long term capital gains rate of 15%.

Only the $15k profit (minus any commissions, fees, or other selling costs.) will be taxable. On such a tiny amount don’t fret it. If you don’t like the investment any more, move on. You can skip the 1031 as that will cost $800-$1,000 and you’re probably looking at $2,000 in taxes or less depending on your regular income. You’d be paying 40-50% of the taxes in fees to delay paying them

Quite the market you have with $20k or even $40k duplexes.

Selling rental - capital gains tax?

Selling rental - capital gains tax?

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