We may be ￼listing our single-family home investment property this month. It has greatly appreciated and if sold, we could clear $100K. I used 1031 exchanges in the past but failed to find a replacement. I don’t want to do this again especially if prices will be lower in the mid-term. So, I’m looking to defer/ avoid a tax bill. I plan to invest it in a MF in an another 12-24 months from now. Thanks in advance!
Do you have any passive losses trapped in the property?
Is $100k your actual taxable gain or cash at close? Those two can differ.
You can also look into opportunity zones- You're also on a time constraint there but you are allowed to withdraw your basis in the property tax free and only re invest your gain. But there there are some hoops to jump through to qualify for the tax benefits of the OZ.
The amount you clear doesn't necessarily equal the amount of gain that you will have on the sale(I.E. doing a refinance).
Even in this situation if we assume the cleared amount if the gain. You would save $20,000 of taxes if we assume 15% long-term capital gain federal tax rates and another 5% in state taxes.
I would prefer to save $20,000 if I had to be focused and picked a replacement property.
You can potentially do a reverse 1031 if you are concerned about running out of time.
Alternatively, there is putting the gain into a Qualified opportunity zone.
@Basit Siddiqi , yes, I’m tracking the difference. It was bought it for $50K and may sell for $150K. I’m likely not going to exchange it in 180 days and likely not going to look for an opportunity zone property. I’ve heard about a Delaware Trust. This may work.
@Bryan Mitchell , if you've done them before you know the drill with a 1031. Nothing is assured that you'll find a good replacement. But there's no penalty for starting one and not completing it. $750 or so buys you the extra months and a half to explore the mid covid market. And that might be money well spent - especially if you have a DST pr op zone property as a fall back so that you can still use those to defer all your gain.
Starting the exchange at least gets you another at bat.
@Dave Foster , yes, I’ve used your company the last time and I know the drill. Unfortunately, 1031s are fairly restrictive given the limited time to find a replacement property. I am looking for alternatives to 1031s.
I know it man!! @Bryan Mitchell you worked it hard but just couldn't find something that worked. The DST option is dependent on the 1031 exchange to defer tax. So if you're really wanting an alternative the Opportunity zone is the one that would work for you. But Op zones are getting a little long in the tooth in this market. Still some out there. You've just got to really vet well.
Hi @Bryan Mitchell ! Do you mind if I ask why you plan on selling the property?
From reading the comments it seems like none of the options presented will work for what you are looking to do. I am not sure what you currently owe on the property but have you considered either taking a mortgage (if you don't yet have one) or doing a cash-out refinance (if you currently have a mortgage with a low balance)? Depending on what you owe on the property, what it would appraise for, and what the cash flow looks like, this could be a good option to avoid paying the tax on the gain (at least for now).
We owe $25k or less. I could do a cash out refinance and pull out about $100k and still produce cash flow. Not a bad idea if I actually needed the money which I don’t at the moment. At some point we will. Like you said, if I sold we’d pay a hefty sales tax bill and more in depreciation recapture.
@Bryan Mitchell exactly. Only reason I would say refi now rather than later would be to get cash out and take advantage of the low rates. You could also refi now, get the cash out, find another property you want and then sell and 1031 the gains into that new property once you find it. By not rushing to sell now you give yourself more time to find a replacement for a 1031 but it all depends on what your plans are for the current property.
@Ryan Elblein I tried to do a 1031 for a property I sold in January. So, I’m not considering another 1031. Prices in the markets I’m in, Atlanta included, are still at all time highs and aren’t reflecting a looming recession and effects on an elated housing market. With 1031s you have to identify a property in 45 days and if we expect the market to headed for a correction, we’d be accepting more risk. I’m not willing to accept this amount risk at the moment. Yes, effective risk mitigation strategies are available, but I see don’t see a 1031 doing that for me. The property cash flows and is in a high demand area. So, I will not have high vacancies. I plan to make a significant purchase in 20 months. As for interest rates, do you think the Fed will raise them during a recession?
@Bryan Mitchell gotcha, I wasn’t necessarily suggesting doing a 1031 right now. The point I was trying to get across is if you do a cash out refi now then you get most of the cash out, pay no capital gains tax, still have a cash flowing property, and can take your time finding a replacement property if you wanted to do a 1031. You have a time limit for a 1031 once you sell your property but there’s no time limit before you sell. Meaning you could keep the property cash flowing and be on the hunt for a replacement for the next 5 years if you want and then once you’ve found the replacement you can sell yours and 1031 into the new one. Either way I think the only way to get the benefit of cashing out on the property without paying capital gains tax would be to do a cash out refi in this particular case. Hopefully this helps!
Hi @Bryan Mitchell . Just curious about how this is unfolding for you? This may not be for you (since you are not doing a 1031 exchange), but I will say for others that if pressed on time in your 1031 replacement search, a DST (Delaware Statutory Trust) is a last-minute option for many.
@Paul Moore , yes, i heard it mention that on a previous webcast. Too late for me, but it’s a good option for others. I’ve spoken with my CPA and we’re planning for a tax bill next filing. Now, I’m looking for other tax strategies. More to follow.....