Well, not entirely, but you can shield more of it.

I'm going to use a very round and specific example to demonstrate this concept. Check my understanding of the tax law on this.

Let's say you make x a year. You want to sell your rentals, and you will get some money in capital gains. You will owe money on that gain, 15% capital gains based on the tax bracket you're in from W2 inome. Talking LONG TERM capital gains tax rate, which as I understand it, does not affect your tax rate as it does not get added to your ordinary tax rate from say, W2 income etc.

So why not take a year off, literally from January 1st to December 31st, live off your rental income/savings, basically let's say 50K that you would otherwise save, take a year long sabbatical/vacation of a lifetime doing nothing or road tripping, and show low enough income on your taxes the next year that you owe ZERO capital gains taxes. Yes, you spent 50K of rental income and savings mixed so that you could maintain your lifestyle but still show low taxable income (tax advantaged rental income). But you saved money on capital gains taxes, so you still come out with a largely free vacation. You spent what you saved in say, capital gains, on vacation.

The beauty of this is that not only do you come out WAY ahead tax wise despite living with no W2 income for a year, you got a vacation, loooong one, and because rental income is tax advantaged, if your properties show as a loss despite being cash flow positive and you have enough of them, you could basically live off the rental income alone and pay ZERO taxes, and NOT have to dip into savings for that 50K living expense that year. You need enough properties to do this but it's doable.

Thoughts?

Keep in mind that once you move into a tax bracket of 15 or 20% tax bracket upon a sale of too many properties in one yes, you still owe capital gains on the portion above the tax bracket that owes 15%+ capital gains. But you do reduce your overall tax by nearly 6K. The end result. You either take a year off free with zero capital gains tax, because you spent that money living instead. So financially you are the same as you were before the sale, but you got a year off instead of paying it in taxes. 

Originally posted by @Jack B. :

Well, not entirely, but you can shield more of it.

I'm going to use a very round and specific example to demonstrate this concept. Check my understanding of the tax law on this.

Let's say you make x a year. You want to sell your rentals, and you will get some money in capital gains. You will owe money on that gain, 15% capital gains based on the tax bracket you're in from W2 inome. Talking LONG TERM capital gains tax rate, which as I understand it, does not affect your tax rate as it does not get added to your ordinary tax rate from say, W2 income etc.

So why not take a year off, literally from January 1st to December 31st, live off your rental income/savings, basically let's say 50K that you would otherwise save, take a year long sabbatical/vacation of a lifetime doing nothing or road tripping, and show low enough income on your taxes the next year that you owe ZERO capital gains taxes. Yes, you spent 50K of rental income and savings mixed so that you could maintain your lifestyle but still show low taxable income (tax advantaged rental income). But you saved money on capital gains taxes, so you still come out with a largely free vacation. You spent what you saved in say, capital gains, on vacation.

The beauty of this is that not only do you come out WAY ahead tax wise despite living with no W2 income for a year, you got a vacation, loooong one, and because rental income is tax advantaged, if your properties show as a loss despite being cash flow positive and you have enough of them, you could basically live off the rental income alone and pay ZERO taxes, and NOT have to dip into savings for that 50K living expense that year. You need enough properties to do this but it's doable.

Thoughts?

Keep in mind that once you move into a tax bracket of 15 or 20% tax bracket upon a sale of too many properties in one yes, you still owe capital gains on the portion above the tax bracket that owes 15%+ capital gains. But you do reduce your overall tax by nearly 6K. The end result. You either take a year off free with zero capital gains tax, because you spent that money living instead. So financially you are the same as you were before the sale, but you got a year off instead of paying it in taxes. 

There are so many other factors that goes into quitting job than just tax. I don’t think people would quit job to save taxes. 

Also, who would quit 50k job to save 6k in capital gain tax? 
 

@Jack B.

You lost me on the basic premise of your plan: you're trying to EXIT your rentals? Kill that golden goose that provides you with $50k annual cash flow? Not to mention appreciation aka wealth building? To fund a year-long sabbatical?

And you're happy that you found a way to kill your wealth with minimal tax impact? 

I'm not analyzing your tax calculations, I'm just trying to understand your overall thinking.

Long term capital gain rates are currently 0%, 15%, and 20% based on how much income you make in total.  So a couple filing joint with less than $80,000 in income could technically pay 0% in capital gains, theoretically.  Also, you could consider an installment sale to spread the capital gain over a number of years.  Depreciation recapture is what kills your idea if you've had any of the properties being sold for a number of years as recapture is not taxed as a capital gain, but rather ordinary income that could push you into a higher tax bracket. 

Originally posted by @Ashish Acharya :

Originally posted by @Jack B.:

Well, not entirely, but you can shield more of it.

I'm going to use a very round and specific example to demonstrate this concept. Check my understanding of the tax law on this.

Let's say you make x a year. You want to sell your rentals, and you will get some money in capital gains. You will owe money on that gain, 15% capital gains based on the tax bracket you're in from W2 inome. Talking LONG TERM capital gains tax rate, which as I understand it, does not affect your tax rate as it does not get added to your ordinary tax rate from say, W2 income etc.

So why not take a year off, literally from January 1st to December 31st, live off your rental income/savings, basically let's say 50K that you would otherwise save, take a year long sabbatical/vacation of a lifetime doing nothing or road tripping, and show low enough income on your taxes the next year that you owe ZERO capital gains taxes. Yes, you spent 50K of rental income and savings mixed so that you could maintain your lifestyle but still show low taxable income (tax advantaged rental income). But you saved money on capital gains taxes, so you still come out with a largely free vacation. You spent what you saved in say, capital gains, on vacation.

The beauty of this is that not only do you come out WAY ahead tax wise despite living with no W2 income for a year, you got a vacation, loooong one, and because rental income is tax advantaged, if your properties show as a loss despite being cash flow positive and you have enough of them, you could basically live off the rental income alone and pay ZERO taxes, and NOT have to dip into savings for that 50K living expense that year. You need enough properties to do this but it's doable.

Thoughts?

Keep in mind that once you move into a tax bracket of 15 or 20% tax bracket upon a sale of too many properties in one yes, you still owe capital gains on the portion above the tax bracket that owes 15%+ capital gains. But you do reduce your overall tax by nearly 6K. The end result. You either take a year off free with zero capital gains tax, because you spent that money living instead. So financially you are the same as you were before the sale, but you got a year off instead of paying it in taxes. 

There are so many other factors that goes into quitting job than just tax. I don’t think people would quit job to save taxes. 

Also, who would quit 50k job to save 6k in capital gain tax? 
 

 That's not what I said, you misread or misunderstood the scenario. I didn't say a 50K a year job. I said let's say that's your living expense, covered by rental income. I said your income is X a year....

Nor did I say that's all you save.....

Again, you misread and misunderstood all of what I posted.

For you tax pros out there, is this how it works are far as 'brackets' go, I very rough numbers?

If we have 40K of ordinary/W2 income, and then have 40k of capital gains that capital gains is 0% since we did not 'go over' the income limits for the 0% CG tax bracket.

But, if we have 40K of ordinary/W2 income and then have 80K of capital gains, HALF of that capital gains would still be taxed at the 0% rate (up to the aprox 80K of total income limit) and THEN the 40K that is ABOVE that threshold would be taxed at 15% capital gains, since IT is the amount over the 0% threshold?

Thanks, Dan Dietz

Have you explored a 1031 Exchange - This allows you to buy another property and scale up while tax deferring the gain. 

Basically, the government says you did a good deal on this one, reinvest the full gains (a "partnership" of sorts) with expectations that both your gains and your tax bill will be higher later. 

If you perpetually do 1031 Exchanges, you never pay capital gains. If you eventually do, that's fine, you got to play with "bigger" dollars at a quicker pace and still make yourself quite wealthy in the process. 

@Daniel Dietz

I just answered your question in a separate post:

https://www.biggerpockets.com/...

I think I should start charging you, Dan :)