Investors & landlords

Hi @sk4000sk. A lot of good questions. I'll give you some info on some of them and leave others for other volunteers to answer.

First off reinvestment of proceeds does not avoid capital gains. (Unless you you do a very special thing called a like-kind (or section 1031) exchange. That requires special advise and very exacting procedures and time lines. https://www.investopedia.com/terms/l/like-kind_exchange.asp )

1. yes it will still be a rental because it was last a rental (Dec 2019), had been a rental for a long time. If you had used it personally in 2020 (say as your residence or storage) or intended to that might be different.

2. The $250k/$500k exclusion is from the tax code section 121.  https://www.law.cornell.edu/uscode/text/26/121 It does not seem to apply to you because you can't meet the personal residence for 2 of the last 5 years (see below and review very carefully because you are close.)

• You can't exclude gain due to depreciation reducing your basis. See 121(d)(6).
• Be sure to check the dates very carefully.  You are getting close the 5 year and 2 year periods. It seems like it might not apply but it is close. It may depend upon when in 2020 you sell. If you sell 6/30/20, then 5 years before is 7/1/15. Using round dates (e.g. 12/31) you would have lived in it 7/1/15-12/31/16 (1.5 yrs) and rented it from 1/1/17 to 6/30/20. (3.5 yrs).  So you don't seem to meet the 2 year requirement.
• Your exclusion ($250k/$500k) is reduced by the portion of time it was not used as a residence. Search for "example" in http://www.exeter1031.com/article_changes_to_section_121.aspx keep in mind that article is from 2008 and may not be fully accurate anymore.

3. Capital gains is not based on the land value. It is based on your gross proceeds (minus cost of sale, e.g. commissions, transfer taxes) of the sale minus your adjusted basis. Your adjusted basis is the cost you paid for the property (land, building, roads, sewer, whatever) plus improvements minus depreciation.  Note that loans have nothing to with gain calculation. 

TT will walk you through the sale. If you have used TT for the rentals it will automatically know the depreciation numbers and will deal with any recapture correctly.

Capital gains rates are super low. Typically they are 15%. Can be 20% if you make more than about $400k (single, $488 joint). There can even be a small amount taxed at zero if you don't have much income. (Not likely if you have a significant gain. See https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/

(And if you don't like paying gain on the depreciation just remember that you deducted it from ordinary income taxed at a higher rate and had the use of that money tax-deferred for years. A very good deal for you.)

4. It appears that NC has a 5.5% capital gains tax rate. https://pocketsense.com/capital-tax-laws-north-carolina-8497762.html

5. No. You only pay tax on the gain not the proceeds. Loans do not enter into the gain calculation.

6. Where did you get the 120 days? You can't avoid capital gains by reinvesting unless you do a 1031 exchange. (Pre 1997 I think you could reinvest your primary residence proceeds and defer taxes, but not since then.) I think the 1031 exchange deadline is 180 days with the replacement property (must be a like kind, here a rental real estate property) identified within 45 days of sale. If you do this you must get professional advice.

7. That is too hard a question for a volunteer forum and one for which there is likely no answer.  A lot of that depends upon the rental income compared to your equity, how much you think it will increase, how much you think the property will appreciate and what your alternative investments are. Simply not possible for us to know those things. You might seek the advice of a certified financial advisor (look for the CFP designation) who works with rental real estate and pay by the hour not by commission on investment products sold.

I hope that helps a little bit. Please triple check the 2 of 5 year dates and continue to research that. This is my initial thoughts on that but you should be certain either way.