All Forum Posts by: Sean Ross

@Garrett Smith let me elaborate on @Brandon Bruckman's good points above.  There are syndicated deal sponsors that specialize in 1031-exchange-friendly deals (either exclusively or as a side product) and that might be worth investigating for you.  I have a contacts in this space if you're interested. 

Given your circumstances I think that a 1031 exchange is likely the most tax-efficient option for you.  Again, Brandon is right to highlight DSTs as a cousin of syndicated investments for a passive investor. 

@John Mainarich great post and glad to have you on board. 

Don't let yourself get caught in an intellectual web with investing.  Better to dip your toes in early.  

You'll end up getting the bumps and bruises out of the way while you're still dealing with small sums and while you still have plenty of time to make it up. 

Also, study economics formally and informally.  And don't stop. Specifically microecon.  Learn about opportunity costs, understand how valuations work, etc. 

@Mark J. especially because a 1031 exchange in PA would only defer federal taxes, any 1031 exchange company/specialist in the country can help you out.  In fact, many 1031 providers are set up as national intermediaries. This is also useful if you might consider reinvesting in another state. 

@Dan Snyder very sorry to hear about the circumstances surrounding the property. You're asking a good question about a relatively subjective part of the tax code.  

The IRS, of course, doesn't frequently dive into the storyline. As sympathetic as everyone on BP is, you should follow the advice that @Bill Exeter gives here: List the property as an investment on your 2020 returns. Treat it as such moving forward in any documentation. This shows intent. 

My guess here (?) is that you do not have a track record of buying real estate and selling it shortly thereafter with great frequency.  The IRS will sometimes look to your past investment pattern when determining intent. 

Beyond those considerations -- unless we are missing other salient facts -- I would advise continuing down the 1031 road. 

@Carlos Silva here is a quick list (not comprehensive) of what the IRS considers "like-kind" real estate in a 1031 exchange:

• single-family residential
• multi-family residential
• commercial
• resort
• farm or ranch
• storage facility
• net-lease management
• unimproved land
• water rights
• oil rights
• timber rights
• properties with a TIC structure or other fractional interests
• options to purchase
• conservation easements
• Delaware Statutory Trusts

So you can use your proceeds as a down payment on any of these as long as your intent is to hold them for long-term use (investment or business). 

Thank you for the kind words @Cj Powderhorn and for a good question. 

Mind if I break this answer into two parts?

• First, let me quickly recap how long-term capital gains affect (or interact with) your income. Suppose you're filing as a Head of Household and show $50,000 in income and then face a possible $100K in long-term gains from the sale of real estate. Does this mean you have a taxable income of $150K?  Thankfully no, but it's more complicated. 
  
  Since the gap between the 15% taxable gains threshold and your income is about $3,600, then the first $3,600 of long-term capital gains would be taxed at 0%.  The subsequent $96,400 in capital gains would be taxed at 15% (federally -- of course your state tax rates must be considered).
  
  The 0% rate would not apply to all $100K in gains, sadly.  

• Second, let me remind you (and the BP world) that you must also consider depreciation recapture taxes when looking at your possible tax liability. This rate is 25% and can often be quite large.  Don't just look at the capital gains.

Finally, I want to bring a classic microeconomic insight -- what matters is not just the taxes you might pay or avoid, but what else you could do if you didn't do a 1031 exchange.  In other words, what are the opportunity costs. 

Exchanges are great for tons of reasons, but they aren't a cure all and they come with some drawbacks.  1031 rules limit what you can buy, when you can buy, how much you should spend, how you treat the replacement asset, etc.  Even if you technically can defer $5000 in taxes (after 1031 fees) by doing an exchange, maybe that isn't enough compensation to offset those limitations imposed on your choices. (Now, of course it's a different story if a 1031 exchange can defer $50,000 or $500,000 in taxes...which is again often the case)

I hope this helps. Did I fully answer your question?

@Taylor Fortini  Very happy to help  I'll send  you an invite and we can connect whenever you have any questions.  If you have any simple questions of course we can cover them here (where others can see too). 

@Allen Berrebbi good questions. 

Let me keep this straightforward:

• 1031 exchanges are not applicable to primary residences or other non-investment/business properties
• If you sell a primary residence that you have lived in for at least two years, then you can sell and claim your Section 121 "homestead" exemption and it will exempt you from up to $250K in capital gains (or $500K if married and filing jointly). 
• Since this is your main home, you do not have to worry about the 45-day identification rule or any of the other 1031 exchange restrictions. 

Hope this helps!

 This evoked an audible chuckle, Bill.  Very self-aware!  

Bill and Dave have you covered with the technicalities.  Let me give you some practical advice based on past/current clients. 

• The facts on the ground will trump an email you've sent or a Bigger Pockets post.  If you've a track record of investing in the long-term with your real estate holdings, then I advise engaging with this property in a similar fashion. Time held for investment is only one of many factors.  Your job is to manage your real estate in the best way you see fit.  That's more important than worrying about 9 months vs 15 months vs 24 months. 
• If you're thinking about changing the use of a property due to extenuating circumstances (family dynamics, loss of income, COVID, recession, etc), then it's probably a good idea to log that thought or share that with someone in a durable format. 
• Audits are rare. The IRS is very busy, usually understaffed, etc.  Don't lose sleep over the IRS. They'll do their job, but they aren't "out to get you."  Just prepare intelligently and ask good questions, like you've been doing. 
• Avoid spending a lot of personal time at the property during the investment period. 
• If you want to be conservative, wait the two years.  Make sure that you report it as an investment property and depreciate it on at least two tax returns. 

@Dave Foster hit it on the head @William C Bruckner.  You can do this but you should really step up your expensing and documentation. If you've ever acted as a GC before, try to charge in line with that prior work.  Set up a separate entity and keep separate books. You don't want proceeds from your 1031 account ending up in a personal DDA.  

And, as probably should go without saying, report all of the income and pay taxes on it. 

We have clients follow these steps and they've been perfectly fine.