Capital Gains Sell Rental to Pay Primary Residence Mortgage

5 Replies

Capital Gains Question

In the next year or two my wife and I and planning to move to the Dominican Republic. 

We own 3 properties here in USA

Property #1 Rental owned free and clear, Valued at $250,000.00 with $125,000.00 capital gain if sold.

Property #2 Rental owned free and clear Valued at $300,000.00 with $100,000.00 capital gain if sold.

Property #3  Primary Residence Valued at $400,000.00 with a mortgage balance of $225,000.00

Essentially rent from Property #1 pays mortgage of #3

We would like to only have 2 rentals when we move...easier to manage.  We would also prefer NOT to sell the Primary Residence as we would want to move back into it in 5 to 10 years.

Can I sell Property # 1 and use the proceeds to payoff Property #3 mortgage and then convert #3 in to a rental with out paying capital gains...or at least defer those gains.  Ideally I would like to move back in to Property #3 as my Primary Residence and avoid any tax at all as we never plan to sell #3 and leave it to our daughter.  I have read you can roll proceeds from one investment in to another with out Captial Gain.  Rather sure this is not possible .

Probably a better question for a CPA....but I thought I would see if anyone here knows.  

Thanks,

Larry

@Larry Johnston To caveat, I am not a CPA, but had a similar situation.  If you sell property #1 and pay off property #3, you will still incur capital gains taxes of $125k from the sale of property #1.  I will recommend you reach out to a CPA and work on tax strategies to try to reduce the capital gains if you can.

Rolling over capital gains as you mentioned is a 1031 exchange used to defer capital gains and purchase another property.

I know you want to keep property #3, but if you lived in this property for at least 2 years in the last 5, then you can sell it and be exempt from capital gains taxes up to $250k if single and $500k if married.

Best of luck!

Originally posted by @Larry Johnston :

Capital Gains Question

In the next year or two my wife and I and planning to move to the Dominican Republic. 

We own 3 properties here in USA

Property #1 Rental owned free and clear, Valued at $250,000.00 with $125,000.00 capital gain if sold.

Property #2 Rental owned free and clear Valued at $300,000.00 with $100,000.00 capital gain if sold.

Property #3  Primary Residence Valued at $400,000.00 with a mortgage balance of $225,000.00

Essentially rent from Property #1 pays mortgage of #3

We would like to only have 2 rentals when we move...easier to manage.  We would also prefer NOT to sell the Primary Residence as we would want to move back into it in 5 to 10 years.

Can I sell Property # 1 and use the proceeds to payoff Property #3 mortgage and then convert #3 in to a rental with out paying capital gains...or at least defer those gains.  Ideally I would like to move back in to Property #3 as my Primary Residence and avoid any tax at all as we never plan to sell #3 and leave it to our daughter.  I have read you can roll proceeds from one investment in to another with out Captial Gain.  Rather sure this is not possible .

Probably a better question for a CPA....but I thought I would see if anyone here knows.  

Thanks,

Larry

If you sell your rental and don’t do any capital gain deferral strategy such as 1031 exchange, then you can’t really avoid the taxes, even if you reinvest the money into your other properties or business.

With the primary residence, you have to be careful about non-qualified use if you eventually sell it. If you just wanna leave that to your daughter then it might not be relevant. 

@Larry Johnston , to piggy back on what @Ashish Acharya said, the 1031 can't be used to pay down a mortgage on property you own.  It must be used to purchase new investment real estate.

Property 2 is the one to sell if you're going to.  It will free up the greatest amount of cash with the lowest cap gain.  Looks like you could pay off the mortgage on your primary and pay the tax and still put around $50 - $60K in your pocket.

If you couple that with rent income from the rental while you're in the DR you will come out pretty good.

@Larry Johnston

My colleagues addressed the technical side of your question. I want to add a strategic point. You said that your reasoning to get rid of a rental property was the difficulty of management. 

This is similar to saying that you want to raise only one kid because there's only one school and one wedding. 

Management is a problem that is relatively easy to address. Giving up a long-term wealth-building asset in order to avoid a minor hassle sounds not well thought through.