Author Topic: Selling a rental property. Capital gains?  (Read 700 times)

jakenoack

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Selling a rental property. Capital gains?
« on: May 20, 2019, 05:48:22 PM »
Hey all,
I am hoping to get some information and input from you fellow mustachians. I have a rental property in Washington state that I have owned for just north of 6 years. I am thinking of consolidating a little bit to prepare for FIRE in a few more years. I anticipate moving away and donít want the hassle of having a rental here when I am gone. Property prices are at an all time high here, so I am thinking it might not be a bad idea to sell while I can.

I was wondering what options do I have upon selling (especially regarding capital gains). Can I defer gains by taking equity from rental and putting it toward my current mortgage? A coworker claimed he had sold a house, kept the cash, and did not have to pay capital gains. He claimed Washington state allows you to do this once. I have never heard of that and it sounds too good to be true. The other idea I had was taking the cash, paying the capital gains, and dumping money into vtsax in vanguard. Anyone know what %  Washington state charges for capital gains on a rental property?

SeattleCPA

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Re: Selling a rental property. Capital gains?
« Reply #1 on: May 21, 2019, 06:59:57 AM »
Washington state doesn't levy an income tax... so you don't pay Washington state any income taxes (including capital gains taxes) on sale. (There is an excise "transaction-y" tax...)

Sounds like you may already reside in another state though? Or may by the time you sell? That state may tax the gain...

On your federal tax return, you'll pay something called the "unrecaptured Section 1250 gain" tax (which is sorta like an average of capital gains taxes and ordinary income taxes) on the depreciation you either took or the depreciation you were supposed to take but which you forgot to take. And you'll also pay what's essentially capital gains on the true appreciation in the price. Finally, you may also pay some Obamacare taxes on some of the gain if your income (including the gain on the sale) gets high enough.

You can use a Sec 1031 "like kind exchange" to defer (or delay) paying the income and capital gains taxes... that may be what the friend tried to describe (though it sounds like they scrambled the rules).

Some additional resources...

This blog post explains 1031 exchanges in more detail--and maybe why sometimes people don't want to do this:

https://evergreensmallbusiness.com/1031-like-kind-exchanges-dont-make-sense/

Also here's a blog post that explains how Obamacare tax hits real estate investors and when you can avoid that tax:

https://evergreensmallbusiness.com/real-estate-investors-net-investment-income-tax/

BTW, if you're moving to a state with income taxes, it would seem to press the scale in favor of NOT using a section 1031 exchange... If possible to do, why not file taxes in way where you pay federal taxes today rather than filing taxes in way where some future day you pay federal income taxes and then also state income taxes.