I’m wandering if someone out there can talk to me about capital gains tax and how that would come into play when owning investment properties? Would there be a time to sell and a time to hold based on capital gains tax?

There would be no capital gains if you sold and do a 1031tax free exchange.... Talk to a 1031 exchanger in your area or state. They will openly talk with you and generally invite you to a work shop of learning.

@John Barrows great thanks for the advice!

@Michael Skoczylas Hey Michael,

Thanks for the response. I am just now getting in to investment real estate. My wife and I are going to start with a “house hack” living in the bottom floor of a large 3 unit house. When discussing why the current owner would be interested in selling (current owner owns 12 units in neighborhood) my agent mentioned that the reason was because of Capital Gains Tax. Haven’t talked with him about why just yet and thought it would be a good time to do my first post on BiggerPockets! I appreciate any input!

Well that could mean a few things. 

1. He wants to do a 1031 - and avoid capital gains tax. 

2. He may be in a lower bracket this year, and would be paying less capital gains tax now than next year. 

3. He feels that Capital Gains taxes are only going up from here, and wants to take advantage of the lower rates today. 

Could mean any number of things.

@Will Payne PLEASE only take advice from a tax advisor / cpa / accountant. There are so many laws, loopholes and gotchas every situation is different.

Originally posted by @Will Payne :

I’m wandering if someone out there can talk to me about capital gains tax and how that would come into play when owning investment properties? Would there be a time to sell and a time to hold based on capital gains tax?

 Capital Pains Tax: Just when you think you are making good money, the Government steps in to collect their share.

Silent partner Uncle Sam @Will Payne , Silent partner Uncle Sam.   There's a ton of reasons why someone would sell and the answer could be "capital gains tax" but mean entirely different things.  Impossible to speculate.  If you want to know the real skinny talk directly to the investor.  His realtor may or may not know.  Your realtor is way to distant to the source to have credibility.

But what I do know is that you are on a great trajectory!!!  If you house hack by living in 1/3rd and renting 2/3rds then you'll get all the benefits of investment property ownership including substantial depreciation.  And if you live there for two full years then you can sell and take the % of gain allocated to the residence portion tax free up to $500K of profit if your married.  The remainder of the gain you will defer by doing a 1031 exchange to purchase new investment property.  So you wont' pay any tax conceivably.  Part will be tax free - go and have fun.  Part will be tax deferred - you get to use the deferred tax to purchase new investment property - finally one instance where silent partner Uncle Sam actually helps you out!!

Well done!

Originally posted by @Dave Foster :

Silent partner Uncle Sam @Will Payne , Silent partner Uncle Sam.   There's a ton of reasons why someone would sell and the answer could be "capital gains tax" but mean entirely different things.  Impossible to speculate.  If you want to know the real skinny talk directly to the investor.  His realtor may or may not know.  Your realtor is way to distant to the source to have credibility.

But what I do know is that you are on a great trajectory!!!  If you house hack by living in 1/3rd and renting 2/3rds then you'll get all the benefits of investment property ownership including substantial depreciation.  And if you live there for two full years then you can sell and take the % of gain allocated to the residence portion tax free up to $500K of profit if your married.  The remainder of the gain you will defer by doing a 1031 exchange to purchase new investment property.  So you wont' pay any tax conceivably.  Part will be tax free - go and have fun.  Part will be tax deferred - you get to use the deferred tax to purchase new investment property - finally one instance where silent partner Uncle Sam actually helps you out!!

Well done!

@Dave - not sure if you will be able to answer this, but in another thread someone was asking the question "can I use FHA to buy a house, live in it for a year and then turn it into a rental, then buy a second house using FHA and live in it a year and turn that one into a rental too, and so on, and so on., keeping all of the properties. ( a mortgage broker said "technically, yes"). But that raised a question in my mind whether any of the properties would be eligible for a 1031 exchange. Do you have insight on this?

@Mike M. , For purposes of 1031 the type of loan is irrelevant.  It is the use of the property that qualifies it for a 1031 exchange.  So if you followed that plan and got a primary residence loan and then moved out and rented it after a year or so (I'm assuming you honor whatever the loan terms are) then it would indeed qualify for 1031 treatment because you were using it for investment purposes.

So that would be fine. Where it would get sticky real quick is if you got an FHA primary residence loan on a property you never lived in and then a year later wanted to 1031 it. Again, the 1031 doesn't care what the funding was. But you told the government it was investment property so you could do the 1031. And you told the lender it was going to be your primary residence so you could get a better rate.

If you're audited by either the IRS or a lender you'll have to fell one of them "oops just kidding"!!!

Originally posted by @Dave Foster :

@Mike M., For purposes of 1031 the type of loan is irrelevant.  It is the use of the property that qualifies it for a 1031 exchange.  So if you followed that plan and got a primary residence loan and then moved out and rented it after a year or so (I'm assuming you honor whatever the loan terms are) then it would indeed qualify for 1031 treatment because you were using it for investment purposes.

So that would be fine. Where it would get sticky real quick is if you got an FHA primary residence loan on a property you never lived in and then a year later wanted to 1031 it. Again, the 1031 doesn't care what the funding was. But you told the government it was investment property so you could do the 1031. And you told the lender it was going to be your primary residence so you could get a better rate.

If you're audited by either the IRS or a lender you'll have to fell one of them "oops just kidding"!!!

 It's the use of the property I was wondering about. It would appear that he was planning on putting that it's his primary residence on each new loan application. He plans on living in each (theoretically) for a year and day so it appears he meets the requirements.