how to avoid paying massive taxes of sale of rental

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riptide
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how to avoid paying massive taxes of sale of rental

Post by riptide »

[The OP has updated his status below -- Sold my townhome finally! Capital gains tax and depreciation! - moderator oldcomputerguy]

I'm considering selling my rental property, but there are high taxes for both Federal and State I must pay. Is there any way to minimize this? I'm in South Carolina.
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Re: how to avoid paying massive taxes of sale of rental

Post by fabdog »

You could consider a 1031 exchange to a similar property, that would defer the taxes, and you'd still have an investment, not cash.

You could also invest in specific opportunity zone investments, and defer/potentially eliminate down the road the taxes. I haven't spent a lot of time on these, the funds appeared to have relatively high fees, but it may be an option for you. This covers cap gains, not depreciation recapture

https://www.irs.gov/newsroom/opportunity-zones

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riptide
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Re: how to avoid paying massive taxes of sale of rental

Post by riptide »

thank you, i may need the money and not be able to purchase another investment property at this time
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JoMoney
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Re: how to avoid paying massive taxes of sale of rental

Post by JoMoney »

Sell it for less money. If you didn't have massive profits on the investment, you wouldn't have "massive taxes" on it.
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Re: how to avoid paying massive taxes of sale of rental

Post by YoungSisyphus »

You could move in for two years and make it your primary residence and then sell it
iljets10
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Re: how to avoid paying massive taxes of sale of rental

Post by iljets10 »

YoungSisyphus wrote: Mon Feb 06, 2023 9:22 am You could move in for two years and make it your primary residence and then sell it
You still need to pay taxes on the recapture of the depreciation at a 25% max rate, so that may not solve all of the problem or even most of the problem depending on how long the property has been in service.
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Re: how to avoid paying massive taxes of sale of rental

Post by snackdog »

Sell it via a structured installment payments over as many years as required to keep the taxes at your desired level. The sale proceeds go into an annuity (via an assignment company) which pays you out gradually. The buyer has minimal involvement in this.

Good luck!
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Re: how to avoid paying massive taxes of sale of rental

Post by ubermax »

How about just sitting down with your local friendly accountant .
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Re: how to avoid paying massive taxes of sale of rental

Post by ubermax »

Or just use Google for some tips as I suspect some of the others did in answering your question :happy
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Nate79
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Re: how to avoid paying massive taxes of sale of rental

Post by Nate79 »

YoungSisyphus wrote: Mon Feb 06, 2023 9:22 am You could move in for two years and make it your primary residence and then sell it
This won't really change the tax situation. But it's a common misunderstanding.
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Re: how to avoid paying massive taxes of sale of rental

Post by EddyB »

Nate79 wrote: Mon Feb 06, 2023 10:43 am
YoungSisyphus wrote: Mon Feb 06, 2023 9:22 am You could move in for two years and make it your primary residence and then sell it
This won't really change the tax situation. But it's a common misunderstanding.
Yes, it stopped being awesome in 2009.

I was extremely attentive to tax loss harvesting opportunities last year, in an effort to reduce the bill for an eventual sale of my rental.
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Re: how to avoid paying massive taxes of sale of rental

Post by galawdawg »

riptide wrote: Mon Feb 06, 2023 8:18 am I'm considering selling my rental property, but there are high taxes for both Federal and State I must pay. Is there any way to minimize this? I'm in South Carolina.
Have you done an estimated calculation of your gain on the sale of you rental property? Essentially sale price minus costs of sale minus basis plus depreciation recapture. If so, what do you expect your gain to be? If not, that would be a good first step. Your tax liability may not be as "massive" as you fear.
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Re: how to avoid paying massive taxes of sale of rental

Post by HoberMallow »

If you have a taxable brokerage account, keep an eye out for tax-loss harvesting opportunities.

Long-term losses will offset the capital gains. Short term losses will offset depreciation recapture (technically called Unrecaptured Section 1250 Gains), which is even better since it is taxed at a higher rate.
Last edited by HoberMallow on Mon Feb 06, 2023 12:17 pm, edited 1 time in total.
renue74
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Re: how to avoid paying massive taxes of sale of rental

Post by renue74 »

Other than the 1031 exchange....you could die. Step up basis leaves your property pretty much without cap gains for your heirs.
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Re: how to avoid paying massive taxes of sale of rental

Post by Brianmcg321 »

Just pay them and move on with the rest of your life.
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sc9182
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Re: how to avoid paying massive taxes of sale of rental

Post by sc9182 »

Keep 1031 exchanging into newer/different properties. If you can keep energy for maintenance (or manage with not-too-costly management Co. expenses)., and given that upon demise - all the "depreciation-recapture" becomes zero., and likely that "appreciation" gets step-up basis -- your "Tax" strategy may help you with your legacy.

Alternately, consider -- this is your "life insurance" policy passed tax-free to heirs :-)
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Re: how to avoid paying massive taxes of sale of rental

Post by TightButAggressive »

Others have mentioned it. If you need the cash out soon, tax loss harvesting is the only method I'm aware of to avoid paying the taxes on the gains.
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Re: how to avoid paying massive taxes of sale of rental

Post by Katietsu »

Have you compared the taxes if you sell now vs after you retire? Given what you have told us about your income and career in the past, I am not sure that paying the taxes now is going to be much more “massive” than later. This may be one of those times in life where you need to apply one a cliche like, maybe, don’t sweat the small stuff. Or whatever is most applicable to a situation where you do not have complete control to optimize all aspects of a situation.
Last edited by Katietsu on Mon Feb 06, 2023 12:16 pm, edited 1 time in total.
JHU ALmuni
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Re: how to avoid paying massive taxes of sale of rental

Post by JHU ALmuni »

Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.
It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
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Re: how to avoid paying massive taxes of sale of rental

Post by galawdawg »

JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
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Re: how to avoid paying massive taxes of sale of rental

Post by parsbogle »

galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
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Re: how to avoid paying massive taxes of sale of rental

Post by Rocky Mtn Man »

JoMoney wrote: Mon Feb 06, 2023 8:32 am Sell it for less money. If you didn't have massive profits on the investment, you wouldn't have "massive taxes" on it.
+1. Taxes are never 100% of the profit.
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Re: how to avoid paying massive taxes of sale of rental

Post by Freeadvice »

1031 into a REIT. I don’t know how but maybe there’s a way to do it. https://www.1031gateway.com/lp/reit-103 ... ZjEALw_wcB
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Re: how to avoid paying massive taxes of sale of rental

Post by HoberMallow »

One other suggestion that I didn't see mentioned - don't sell at all and use a HELOC or other loan to access some of the equity. If it's otherwise a good investment property, and you only have a short-term need for the cash, this could be a good idea. Make sure you understand the rules for deducting interest first - if you don't use the proceeds for your rental business it won't be deductible.
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Re: how to avoid paying massive taxes of sale of rental

Post by an_asker »

YoungSisyphus wrote: Mon Feb 06, 2023 9:22 am You could move in for two years and make it your primary residence and then sell it
Doesn't really work that way, as far as I am aware.
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Re: how to avoid paying massive taxes of sale of rental

Post by an_asker »

parsbogle wrote: Mon Feb 06, 2023 12:48 pm
galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
As far as I am aware, you don't get the gains that were in place before you moved in... though I am not an expert in the exact tax treatment.

For example, if you purchased a house in 2012 for $200,000, moved into it two years ago when it was worth $600,000, and sell it today for $700,000, the exclusion will be way closer to $100,000 (if at all) instead of the $500,000 that you are probably thinking.

Of course, if you - or your buddy - has done this and not been audited, that doesn't make it correct! :oops:
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Re: how to avoid paying massive taxes of sale of rental

Post by an_asker »

iljets10 wrote: Mon Feb 06, 2023 9:29 am
YoungSisyphus wrote: Mon Feb 06, 2023 9:22 am You could move in for two years and make it your primary residence and then sell it
You still need to pay taxes on the recapture of the depreciation at a 25% max rate, so that may not solve all of the problem or even most of the problem depending on how long the property has been in service.
Even worse, you (OP) would need to pay taxes on the depreciation recapture whether he/she took advantage of it or not!

I am not looking forward to it myself. :oops:
billaster
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Re: how to avoid paying massive taxes of sale of rental

Post by billaster »

an_asker wrote: Mon Feb 06, 2023 2:41 pm
iljets10 wrote: Mon Feb 06, 2023 9:29 am
YoungSisyphus wrote: Mon Feb 06, 2023 9:22 am You could move in for two years and make it your primary residence and then sell it
You still need to pay taxes on the recapture of the depreciation at a 25% max rate, so that may not solve all of the problem or even most of the problem depending on how long the property has been in service.
Even worse, you (OP) would need to pay taxes on the depreciation recapture whether he/she took advantage of it or not!

I am not looking forward to it myself. :oops:
This is not necessarily the case. What you are referring to is the Section 1250 "allowed or allowable" language for depreciation. Allowed is how much you actually depreciated and allowable is the amount you were entitled to depreciate whether you did on not. So you must recapture the amount allowable even if you didn't deduct it.

But, there are two avenues of recourse.

The first is that Section 1250 also says "if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed."

So if you can reliable prove you didn't deduct depreciation, you don't have to recapture it. Generally this means having a copy of your tax return for every year you owned the property.

The other is a special procedure Rev. Proc 2007-16 that permits you to request a special accounting method that allows you to catch up the omitted depreciation in the year you sell the property. So you depreciate and recapture the same amount and they cancel out.
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Re: how to avoid paying massive taxes of sale of rental

Post by Nate79 »

an_asker wrote: Mon Feb 06, 2023 2:37 pm
parsbogle wrote: Mon Feb 06, 2023 12:48 pm
galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
As far as I am aware, you don't get the gains that were in place before you moved in... though I am not an expert in the exact tax treatment.

For example, if you purchased a house in 2012 for $200,000, moved into it two years ago when it was worth $600,000, and sell it today for $700,000, the exclusion will be way closer to $100,000 (if at all) instead of the $500,000 that you are probably thinking.

Of course, if you - or your buddy - has done this and not been audited, that doesn't make it correct! :oops:
There are past threads on this topic but what I recall is it is prorated based on the number of years as personal residence vs rental.
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Re: how to avoid paying massive taxes of sale of rental

Post by tj »

parsbogle wrote: Mon Feb 06, 2023 12:48 pm
galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
No. If you lived there for 3 years and rented it out for 2 years, it would be all tax free. Moving in for 2 years would have a only portion of it be tax free.
parsbogle
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Re: how to avoid paying massive taxes of sale of rental

Post by parsbogle »

tj wrote: Fri Feb 10, 2023 9:43 pm
parsbogle wrote: Mon Feb 06, 2023 12:48 pm
galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
No. If you lived there for 3 years and rented it out for 2 years, it would be all tax free. Moving in for 2 years would have a only portion of it be tax free.
Thanks for the clarification. It is great to know. I had misunderstood the rules.
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Re: how to avoid paying massive taxes of sale of rental

Post by Joey Jo Jo Jr »

-1031
-CRUT
-structured installment sale
-you don’t have to go 100% with any of these if you need some money out of it
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Re: how to avoid paying massive taxes of sale of rental

Post by galawdawg »

parsbogle wrote: Mon Feb 06, 2023 12:48 pm
galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
Sure. Read again carefully what ChatGPT says.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.

Simply incorrect and terrible advice. There is no exclusion for having "owned" rental property. The fact that it is rental property and not your main home makes it ineligible for the federal capital gains exclusion.

There is, however, an exclusion for capital gains resulting from the sale of your residence when you have owned and occupied it as your main home for a period aggregating at least two of the five years prior to the date of sale.
Starbase
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Re: how to avoid paying massive taxes of sale of rental

Post by Starbase »

ubermax wrote: Mon Feb 06, 2023 10:11 am How about just sitting down with your local friendly accountant .
I've never found one that would help me with stuff like this.
Starbase
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Re: how to avoid paying massive taxes of sale of rental

Post by Starbase »

parsbogle wrote: Fri Feb 10, 2023 10:00 pm
tj wrote: Fri Feb 10, 2023 9:43 pm
parsbogle wrote: Mon Feb 06, 2023 12:48 pm
galawdawg wrote: Mon Feb 06, 2023 12:27 pm
JHU ALmuni wrote: Mon Feb 06, 2023 12:15 pm Quick ChatGPT suggested the below :)

There are several strategies you can use to minimize the taxes on the sale of a rental property in South Carolina. Here are a few options:
  • Defer taxes through a 1031 exchange: You may be able to defer paying federal and state taxes on the sale of your rental property if you reinvest the proceeds into a similar property through a 1031 exchange.
  • Depreciation recapture: If you have taken depreciation deductions on your rental property, the IRS will tax you on the depreciation recapture when you sell the property. To minimize this tax, you can structure the sale as an installment sale, which allows you to spread the tax liability over several years.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.


It's recommended to consult with a tax professional or financial advisor to determine the best strategy for minimizing taxes on the sale of your rental property in South Carolina.
The first two options listed do not MINIMIZE the taxes, they simply defer them. That is a significant difference.

The highlighted portion is completely incorrect. Owning a rental property for at least two years does NOT confer any eligibility for capital gains exclusion.

So a complete bomb of a response from ChatGPT as far as I am concerned.
Can you please expand on why the last approach would not be beneficial? If one has a rental property for 10 years and then moves into it for two years before selling it, isn't that the case that $500K of capital gains could be tax-free? Maybe you intended to distinguish between owning and living.
No. If you lived there for 3 years and rented it out for 2 years, it would be all tax free. Moving in for 2 years would have a only portion of it be tax free.
Thanks for the clarification. It is great to know. I had misunderstood the rules.
I laugh when I see ChatGPT advice :-)
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snackdog
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Re: how to avoid paying massive taxes of sale of rental

Post by snackdog »

galawdawg wrote: Sat Feb 11, 2023 3:56 am
Sure. Read again carefully what ChatGPT says.
  • Capital gains exclusion: If you have owned the rental property for at least two years, you may be eligible for the federal capital gains exclusion, which allows you to exclude up to $250,000 of the sale proceeds from federal taxes if you are single, or up to $500,000 if you are married and file jointly.

Simply incorrect and terrible advice. There is no exclusion for having "owned" rental property. The fact that it is rental property and not your main home makes it ineligible for the federal capital gains exclusion.

There is, however, an exclusion for capital gains resulting from the sale of your residence when you have owned and occupied it as your main home for a period aggregating at least two of the five years prior to the date of sale.
Yes, read carefully. It says you MAY be eligible. That is correct.
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GMCZ71
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Re: how to avoid paying massive taxes of sale of rental

Post by GMCZ71 »

Nice little calculator to see how much tax and what brackets your income and cap gains are in.
https://engaging-data.com/tax-brackets/
We sold the rental in spring of 2021 close to the top. Tried to tax loss harvest with VLCAX index, lol :moneybag market kept going up.

Other things you could do. Max out 401k and if your doing the roth 401 switch back to regular 401.
If your doing Roth ira switch it to trad ira in the year you sell rental.
HSA or other tax deferred options you are eligible for to lower your work income. Try not to have interest income that year(cd-hysa etc)

Realtor and contractor fees are deductions so pay for repairs in the same year you sale the property. Sell in 1 quarter so you don't have rent income for the whole year.

Glad we sold and the taxes were not that bad. Remember cap gain is 15%
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GypsyHome
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Re: how to avoid paying massive taxes of sale of rental

Post by GypsyHome »

When we sold a property that we rented out, we consulted with a good CPA and asked her to run a pro forma for us. Other than rolling the funds into another rental property, we had no other option than to pay the recaptured depreciation. Not fun, but we did it and moved on.
GypsyHome
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Re: how to avoid paying massive taxes of sale of rental

Post by GypsyHome »

When we sold a property that we had rented out for a few years, we consulted with a good CPA and asked her to run a pro forma for us. Other than rolling the funds into another rental property, we had no other option than to pay the recaptured depreciation. Not fun, but we did it and moved on.
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Harry Livermore
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Re: how to avoid paying massive taxes of sale of rental

Post by Harry Livermore »

GypsyHome wrote: Mon Feb 13, 2023 3:43 pm When we sold a property that we had rented out for a few years, we consulted with a good CPA and asked her to run a pro forma for us. Other than rolling the funds into another rental property, we had no other option than to pay the recaptured depreciation. Not fun, but we did it and moved on.
Same here.
OP, did you do this, as Galawdawg suggested? It might not be as bad as you think.
In our case, we had a large loss carried forward (our income is too high to take the loss each year) plus improvements to the property that offset much of the gain. The depreciation recapture is a drag, true. But it was a deduction all those years; and in many of those years we were in a higher tax bracket than last year. So there is at least some arbitrage there.
We discussed the arc of our landlording experience at great length prior to selling. It was, first and foremost, a lifestyle change. I wanted to eliminate being a concierge to our tenants, as well as simplify our personal and financial lives. We agreed that it was "mission accomplished"; that is, 11 years of tax-free cashflow that funded our kids' college costs. The 11 years of appreciation also overcame our vastly over-budget renovation in 2001-2002. And the post-COVID housing bump seemed like a good time to call it quits. The costs of closing this chapter were various refreshes to the property, realtor fees, transfer taxes, and federal taxes and recapture. We had the CPA run a pro-forma and decided it was worth it. We knew that after all costs, taxes, and mortgage payoff, we'd have 12 years' rent, or more, in hand. That seemed like some good icing on the cake.
I suggest you analyze actual numbers and see if the frosting is worth it.
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Re: how to avoid paying massive taxes of sale of rental

Post by Nowizard »

Partial answer is to investigate tax strategies without allowing taxation to control the decision since there are no tax consequences without profits.

Tim
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riptide
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Re: how to avoid paying massive taxes of sale of rental

Post by riptide »

Thank you all, I will talk to my accounting firm, I trust them, had them now for over 10 years.
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Re: how to avoid paying massive taxes of sale of rental

Post by ubermax »

riptide wrote: Tue Feb 21, 2023 9:34 am Thank you all, I will talk to my accounting firm, I trust them, had them now for over 10 years.
Great idea - our son is now in Florida with a rental left behind in Vegas - he has his hands full adjusting to the new life in Florida and doesn't want to face the sale of his home - we've suggested he hire an accountant to do his 2022 tax return over assuming a sale at some price during the year - he can play with different price impacts on taxes just to get an idea - right now prices in Vegas are pretty good but he continues to pay someone to manage the rental - don't know if that's a deductible expense ?

Good luck , I think getting an accountant is a good idea , worth the money - they do this all the time and can provide good options in addition to the tax impact of a sale but I get a sense that you already know the tax impact of a sale .
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Sold my townhome finally! Capital gains tax and depreciation!

Post by riptide »

[Merged into original discussion - moderator oldcomputerguy]

I am very thankful for the large gain I received after I sold my townhome after owning and renting it for 18 years. I made a large amount around $257,000, but a large amount will go to capital gains and depreciation pay back (I don't understand this completely) according to my accountant. It appears the taxes will be around $40,000!! Is there any way to minimize this ? I already have given the accountant a list of capital improvements totaling $15,000. I do not want to transfer for the money to a rental, this has been suggested before, I'm using the money and do not want to be a landlord again at this time! There must be a way to minimize the taxes? It's a shame!
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Re: Sold my townhome finally! Capital gains tax and depreciation!

Post by exodusNH »

riptide wrote: Wed Jun 07, 2023 7:38 am I am very thankful for the large gain I received after I sold my townhome after owning and renting it for 18 years. I made a large amount around $257,000, but a large amount will go to capital gains and depreciation pay back (I don't understand this completely) according to my accountant. It appears the taxes will be around $40,000!! Is there any way to minimize this ? I already have given the accountant a list of capital improvements totaling $15,000. I do not want to transfer for the money to a rental, this has been suggested before, I'm using the money and do not want to be a landlord again at this time! There must be a way to minimize the taxes? It's a shame!
You're paying the taxes you legally avoided in each of the years that you claimed the depreciation.

It's probably too late now, but did you depreciate based on the building value only, excluding your share of the land? That would have been a lower depreciation amount each year and thus less to recapture.

My understanding of the depreciation recapture is this, ignoring improvements:

Bought for $100,000
Depreciated $60,000
New basis $40,000

Sold for $200,000
Raw gain of $160,000 ($200,000 - basis)

Depreciation recapture tax is paid on $60,000, which is paid at your marginal tax rate with a cap of 25%. The remaining $100,000 is long term capital gains, which can be anywhere from 0%-18.8% depending on your income.

If at any time during the 18 years your marginal rate was higher than what it is now (capped at 25%), you're paying less taxes on that income than you would have when you earned it.
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Re: Sold my townhome finally! Capital gains tax and depreciation!

Post by HeelaMonster »

I was in a very similar situation last year, having sold a rental property that doubled in value over the 8 years that we owned it. $40k due in taxes.

The good news is, capital gains are taxed at lower rates, so at least there is that. As for minimizing that tax hit, make sure you have explored and documented anything you can to increase the cost basis. Sounds like you've already done that for improvements, but there are some costs relating to the sale that also can be added to basis.
https://www.taxact.com/support/1637/201 ... 20property.

I also did some aggressive tax loss harvesting (TLH) last year, to help offset the large bump in capital gains.

Presumably your accountant has you submitting an estimated tax payment for the additional amount owed, so you aren't hit with penalties for underpayment?

I am a poor one to explain depreciation, but you were allowed to claim depreciation during the time you rented the townhome, which reduced the tax you owed during all those years. That was a big break, but now the govt is getting some of that back (...perhaps not a great analogy, but I think of it like the tax deferral we get on traditional IRA. The govt eventually collects their share, but we received a nice break for a long time, which was to our advantage.)

P.S., The biggest issue for me was not the tax owed on sale of property, which I expected, but the impact on other tax-related events. I had made a Roth contribution in January, but became ineligible to make that contribution when property was sold at end of year, driving our income through the limits. So there was a lot of work involved to recharacterize that contribution, convert it back, deal with pro rata rules, etc. That was all a bigger hassle than paying capital gains!
Last edited by HeelaMonster on Wed Jun 07, 2023 1:50 pm, edited 1 time in total.
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Re: how to avoid paying massive taxes of sale of rental

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This topic is now in the Personal Finance (Not Investing) forum.
TwoBitsCA
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Re: how to avoid paying massive taxes of sale of rental

Post by TwoBitsCA »

Guess it's too late now for the OP but could you sell your current residence and move in to the rental property? If it wasn't where you wanted to live, could it be swapped via a 1031 exchange, then selling the current residence for the cash?
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Re: how to avoid paying massive taxes of sale of rental

Post by riptide »

TwoBitsCA wrote: Thu Jun 08, 2023 9:04 am Guess it's too late now for the OP but could you sell your current residence and move in to the rental property? If it wasn't where you wanted to live, could it be swapped via a 1031 exchange, then selling the current residence for the cash?
it's too late, i already sold it! But, after the miserable taxes and paying back my tsp loan. I will have just under $200,000 to invest. Where to invest now is the question....
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