All Forum Posts by: Dave Foster

@Brett Hushon, If you have lived in the property for two out of the previous five years you've owned it, you can take the first $250k ($500k if married) of the gain tax-free.

If you rented out the property for less than three years, you would still be within the requirements of the primary residence exclusion.

But, once you convert it to a rental, the property would then qualify for a 1031 and allow you to defer any additional tax left over from the primary residence exclusion if there is any, and reinvest it into another investment property.

If you choose to rent out the property for three years and decide later on to sell it and purchase another investment property, you could still do a 1031 exchange.

A 1031 exchange would allow you to defer all of the tax and depreciation recapture and reinvest it into another investment property that's maybe closer to home.

If you don't need to proceeds from this sale to buy your next house, you have quite a bit of time to allow you to wait to decide what your next steps are.

@Maverick Shah 
I don't see the option to simply keep it as one storefront and one apartment, and cosmetically fix it and rent it or sell it. You can certainly do a 1031 exchange if you decide to sell. But you're not going to turn an orange into an apple.

There is no short-term path to create your envisioned scenario and bring in a profit for a long long time. Better to stabilize and sell for what you can. I would imagine there is some appreciation from the $70K purchase price.

A 1031 exchange allows you to defer all of the tax and depreciation recapture and reinvest it into another investment property. Now you have a greater down payment to work in your favor, and put towards an investment property with better potential.

@Mahmuda L., You can do a 1031 exchange and then rent to your family.  You would want to work with your accountant to make sure that the lease and rent are done at arms-length with market value and reported on your tax return.  If you want to you can use your annual gift exemptions to gift them back their rent.  So they are held harmless.  But you are treating it as an investment.

I don't like that actiion from your manager.   I'd be tempted to rent to your family using the managment company.  You don't even let them know they are your family if you don't want to I would suppose.  And negotiate a lower rent so the management company makes less (it's vacant after all). The management company still gets their fee.  But you've minimized it.   They are not acting honorably.

@Mike Smith, Sorry for your loss. A good property manager is essential for an out-of-state investor since you wouldn't be readily accessible, unless you decide to sell the property and find something closer to home.

On a positive note, the IRS allows the heirs to inherit the property at the new stepped-up basis, so if you decide to sell in the near future, you wouldn't have to pay any tax on appreciation until your Dad's passing.

But if you choose to rent it out for some time and later down the line decide to sell the property, you can always do a 1031 exchange and defer whatever tax and depreciation you have, and reinvest it into another investment property.

@Sharon Carson,

It's important to know what your total gain situation (and depreciation recapture) before making any decisions.  You are correct that if you do a 1031 and purchase a replacement property for only cash you will pay tax on the $154K difference.  

But if you're total gain and depreciation recapture are $400K then a 1031 would make a lot of sense.  You get a replacement investment property for cash.  And you pay tax on $154K but shelter the tax on $246K of gain - this would be a savings of over $50K.  

A DST would absorb all of that $154 difference (a savings of over $30K). But that might not be the right answer either.

Hard money will be more expensive.  But would it be $30K more expensive?  Or how many years would it take of higher interest before you would equal the $30K of tax you pay immediately?

Everyone's giving you good answers.   But they're only good if they meet your parameters and situation.  

@Jonathan Thomas, If you've lived in California property for two out of the previous five years before selling, you could take advantage of the 121 exclusion, which allows you to take the first $250k ($500k if married) of the gain tax-free. That would probably eliminate any tax on the CA sale.

Now, if the property had also been used for investment use, you could also qualify for a 1031 exchange, which would allow you to defer all of the state and federal taxes, along with the depreciation recapture, to reinvest into more investment real estate. But I doubt if you would need to worry about this. I'm guessing the primary residence exemption will cover almost all of the tax.

This would let you use that money at will to purchase a house in GA. The NE house will either need to be converted to an investment property, and then later you would 1031 it. You can only do one primary residence exemption every two years.

You are correct! To defer all of the tax, you must purchase at least as much or greater than the net sale of the relinquished property. If you purchase for less than the net sale of your property, the IRS sees it as taking a profit, and you would have to pay tax on any of the leftover proceeds that you receive.

But again, in this case I don't think you'll need a 1031. You'll have to pay tax on the sale of NE because you haven't lived there long enough. And it's not an investment property. The CA house should be almost tax free except for a little depreciaion recapture.

@Morgan Painter, You only get to eliminate the capital gains if it is your primary residence and you have lived in it for 2 out of the 5 years prior to selling.

If you do find that there are some significant tax implications with selling the property, a 1031 exchange would be a great tool for you to defer all of the tax and depreciation on the property and reinvest it into a property that will provide positive cash flow or have greater appreciation. I would definitely go over the numbers with your accountant first to see if a 1031 exchange makes sense for you.

@Peter Marriott, If you decide to sell and find that the property has become more of a financial burden opposed to an income stream, you may have the opportunity to take some of the profit tax-free and defer the tax on the rest.

Since a portion of the property is your primary residence, you could take advantage of the 121 exclusion, which allows you to take the first $250k ($500k if married) of the gain tax-free for the portion you lived in.

For the rest of the property that was used for investment, you would be able to utilize a 1031 exchange.

A 1031 exchange allows you to defer all of the capital gains tax and depreciation recapture from the investment portion to reinvest into another investment property with more potential.

So there's lots of potential to utilize both of these tools to find a better-performing investment property. And put some money into your pocket tax-free at the same time.

@Michael Rinde, @Jaycee Greene is correct. You can't do a 1031 exchange into a primary residence, only investment property for investment property. BUT..... like @Kate Sanchez says, it would be a very solid pivot - if only there were a way???!!!

Fortunately, there is a way if you have a long enough runway. You do have to purchase your replacement 1031 property for investment use. But once you have used it for a couple of years for investment, you could convert it and move in without triggering a tax event. You could buy the new property and rent it as is, and then improve it before you move in. And if you did need to access some cash for improvements, once you complete your exchange, you could immediately do a cash-out refi. That would allow you to defer all of the tax and depreciation recapture and give you access to some equity to make improvements on the new property.

To help alleviate the 45-day issue, you can start shopping well before your old property sells. If you find a replacement property you really like, you could get it under contract before closing the sale of your relinquished property, and that would minimize the stress of your 45-day identification period. You only need to close the sale of your relinquished property before you take title to the replacement property, but you can also negotiate an extended closing with the seller, and that would be perfectly fine.

Thanks for the shout out @Jason Wray.  I sent a collegue request to you @Padraig Spellman in case you've got questions best asked off line.