“Hi Gary. I’m not sure what to do. I want to sell my rental house in UC, but am facing a big potential tax bill. You’d said it’s worth about $800,000 and I paid $150,000 for it. As we discussed, I do have some interest in buying a home here in the Bay Area for around $400,000. What do you suggest?”
Remember, I am not a CPA, so please verify everything I say below with a tax pro.
And be prepared, as this is going to get a little long and complicated…
Assumptions: Sales price $800,000 with selling expenses of $55,000 (real estate fee, closing costs, cushion for repairs). This leaves a net price of $745,000.
Your 8 options, as I see them:
- Do nothing.
- Sell and pay the tax.
- Move back into your UC home as your principal residence for 2 years, then sell and shelter $250,000 of gain using “IRS Code 121.”
- Sell and do a “1031 Exchange” into a $400,000 home you’d move into in the future. You’d defer some gain, but not all. NOTE: Tax advisors say to wait 1-2 years before moving into a home that you exchanged into.
- Sell and do a 1031 Exchange into your future home + another rental, together totaling at least $745,000.
- Sell and “carry a note” on the house for some or all of your equity. This would defer some of your taxes.
- Sell and do a 1031 Exchange into a “Tenant In Common” or “Delaware Statutory Trust.” These are LIKE buying into a partnership that owns larger properties. We can go into more details on what those are at a later date.
- Do a “Charitable Remainder Trust.” This is a creative yet legal way some people can decrease or avoid taxes on the sale of real estate. This is beyond my expertise to explain, but I can refer you to a tax specialist if you’re interested.
I see several options for you regarding the sale of your house. You will likely have some tax bill with options #2, #3, #4, #6 possibly #7.
Ask your tax person what your federal and state tax bill would be with each option.