Selling a rental property. What about capital gains?

[jakenoack]

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 don’t 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?

[LightStache]

This post should bump to taxes or RE threads.

There are usually three big tax hits when selling a rental: transfer/recordation, cap gains, and depreciation recapture.

To avoid the cap gains and depreciation recapture, you can 1031 exchange into another property (wouldn't work for your goals) or into a Delaware Statutory trust.

You can also do an installment sale to spread the tax hit out over several years, or roll the proceeds into an annuity to simulate a structured sale for tax purposes.

Your friend may have been referring to the tax exemption for the sale of a primary residence -- Fed and State govs give generous tax breaks.

[frugaliknowit]

You need to run each scenario by a professional.  Basically, unless you do a legitimate 1031 exchange, you are subject to capital gains, if there are any.

If your co-worker sold a residential property for a profit and did not buy another, maybe he pocketed the cash under the exemption (only a guess, not a tax professional).