Tax Avoidance Question - LTCG from investment property sale

[mkwirsch]

Married with 2 kids filing jointly

Total income:
W2 = $210k
Rental income = $15k
Total Income = $225k
Taxable Income = $173k (We both max our IRA’s and have suspended losses on the rentals to apply that negate the rental income)

In addition to the above we intend to sell two rental properties we have held for more than 1 year.  Properties are held in our name.  This will result in the following long term capital gain:

Rental House #1 LTCG = $130k
Rental House #2 = $217k

Taxable Income including LTCG = $520k

Based on my understanding of current tax law we can sell rental house #1 and remain in the 15% LTCG bracket ($173k + $130k = $303k) but the addition of the rental house #2 sale would push us into the 20% LTCG bracket as we would have a total income of $520k. 

1. Am I correct that once we pass the income threshold for 15% LTCG all of these capital gains are taxed at 20%. 
2. Does the $520k of total taxable income causes additional taxes (Obamacare, NIIT, AMT) to kick in?  From my research it looks like Obamacare but not others?
3. Would selling rental house #2 in 2019 avoid all these issues and allow us to remain in 15% LTCG bracket?
4.  Are there other tax avoidance strategies beyond 1031 or instalment sale that I have missed?

I have handled financial and tax planning on my own to this point but the investment property sales create wrinkle we have not dealt with before.  Part of the reason for this post is to determine if I need to engage a “professional”.

Thanks in advance for all responses.

[MDM]

1. Am I correct that once we pass the income threshold for 15% LTCG all of these capital gains are taxed at 20%.  No.  LTCG brackets work the same as ordinary income brackets: you pay the bracket rate only on the amount in the bracket.
2. Does the $520k of total taxable income causes additional taxes (Obamacare, NIIT, AMT) to kick in?  From my research it looks like Obamacare but not others? It could.  Best way to determine is to do a 2018 return with tax software that accounts for those items.
3. Would selling rental house #2 in 2019 avoid all these issues and allow us to remain in 15% LTCG bracket? See answer to #2.
4.  Are there other tax avoidance strategies beyond 1031 or instalment sale that I have missed? On this I defer to those who flip houses often, etc.

[ISawTheLight]

A few additional comments:

1.  You indicate that you have carryover losses to offset the rental income.  Any additional carryover losses can be deducted in the year of sale.  So, if you've got $20k of carryover losses and will have $15k of rental income in the year of sale...you can take the remaining $5k as a deduction when you sell. 

2.  Any depreciation that you have taken has reduced the basis in the rental houses.  Does the LTCG you mention take into account that depreciation?  Did you buy the house for $250k and are now selling for $380k to get to $130k LTCG?  Or did you buy at $250k, take $100k of depreciation (so basis is $150k), and are now selling at $280k?  There are different tax rates for depreciation recapture and LTCG.

3.  If your modified AGI is over $250k you will pay the 3.8% NIIT on your investment income to the extent it exceeds the $250k.  This includes interest, dividends, and capital gains (including the gain on sale of the rental property).  If you sell the houses in separate years it looks like you may be able to avoid the 3.8% on portions of each sale.  If your modified AGI without the sales is $200k, the first $50k of investment income will be free of the 3.8%.

[SeattleCPA]

A few additional comments:

1.  You indicate that you have carryover losses to offset the rental income.  Any additional carryover losses can be deducted in the year of sale.  So, if you've got $20k of carryover losses and will have $15k of rental income in the year of sale...you can take the remaining $5k as a deduction when you sell. 

2.  Any depreciation that you have taken has reduced the basis in the rental houses.  Does the LTCG you mention take into account that depreciation?  Did you buy the house for $250k and are now selling for $380k to get to $130k LTCG?  Or did you buy at $250k, take $100k of depreciation (so basis is $150k), and are now selling at $280k?  There are different tax rates for depreciation recapture and LTCG.

3.  If your modified AGI is over $250k you will pay the 3.8% NIIT on your investment income to the extent it exceeds the $250k.  This includes interest, dividends, and capital gains (including the gain on sale of the rental property).  If you sell the houses in separate years it looks like you may be able to avoid the 3.8% on portions of each sale.  If your modified AGI without the sales is $200k, the first $50k of investment income will be free of the 3.8%.

Real estate investors can maybe avoid NIIT if their activity rises to the level of a trade or business.  A little murky, but the trick is to pass the material participation tests in Treasury Regulation 1.469-5T:

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