Capital gains on real estate sale - Buying in same year? (Bronx)

6 Replies

I was offered quite a bit above market price (around 300K more than it's worth in the current market) on my 2 family property by a developer that is looking to knock it down as part of a larger project on my block due to the zoning rights and proximity to the project.  

Question 1:

If I sell and buy another property in my neighborhood asap, are there ways to avoid capital gains taxes?  My accountant said that since my current residence is a multi-family, I would be exempt up to 500K on only my own unit, and would have to pay taxes on the rented portion, but he is based in Jersey and has made mistakes in the past...  He also mentioned a 1031 exchange in which I would keep the profit in escrow, but said it was a costly process.

Question 2:

How valuable are R7-1 zoning rights?  Are they only this valuable when there is a project nearby, or can I always get more for my house because of zoning rights?

I'm trying to convince myself not to sell, but I think it would be crazy to turn down a free 300K that I could invest in more/better properties in the same area.

Thanks!

I'd find another accountant who is more familiar with the 1031 process. Mainly because of the comment about it being "very expensive". The last 1031 I did was in 2001, selling a California house with a 23 year rental history and buying 3 Texas houses. One we rented for 2 1/2 years before we moved into it as a retirement home. The other two we flipped the same day we signed purchase agreements on. IIRC the cost of the 1031 was between $500-$700. Not expensive at all for a $300K sale which would have had an adjusted basis of less than $20K!

The 1031 process is not that expensive and is the way to go. Regarding r7-1 zoning those air rights are very valuable, depending on where you are in the Bronx those air rights can be worth anywhere from 50-90/bsf.

@Michael M. Your tax advisor is correct, the portion of your property that has been used as your primary residence will not qualify for 1031 exchange treatment. Only the portion that has been used as a rental will qualify.

The usual cost for a Qualified Intermediary varies amount companies. On average, I would say the typical cost is around $1,000. It is a permissible selling expense so it will reduce your net sales price and therefore the amount you must replace to have a full tax deferred exchange.

Thanks @Frank Adams @Lukas Rociunas-Englert ... Is R-6 as valuable as r7-1?  I can sell this property with R-7-1 and buy a better property with R-6 in the same area for the same price that I sell at.

@Lauren Speidel Thank you, if this deal ends up materializing I will contact you for specifics.

@Michael M. , You are uniquely positioned to take advantage of a couple of things that can create both a tax free and tax deferred dollars.  Your accountant has parts of the picture but it sounds like he's kind of free wheeling some of it also.

1. Because you have lived in that property for 2 out of the previous 5 years you can sell and take the amount of gain allocated to the primary residence portion tax free up to the $500K exclusion limit (if you're married).

2. Because part of that property is rental you may also do a 1031 on the portion that has been held for investment.  Since the cost of a normal 1031 exchange is commonly $750 - $1000 with a nationally experienced Intermediary I don't know why he thinks that's expensive but to each his own.  The point is you have the opportunity to sell the investment side and purchase new investment real estate without paying tax on that gain as well.

So you can take your cash tax free and spend it however you want.  You can take the tax deferred dollars and purchase investment real estate.  You can combine and purchase another split use property.  You're sitting in a great position to really maximize the return on this investment.

@Michael M. This tax can all be avoided through the use of a special type of trust.  I know an estate planning firm that does this all across the USA.

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