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Level 7

Selling investment property at a gain

I would like to know the percentage of tax I will have to pay if I sell my investment property and make a capital gain.  Also if I sell my investment property and then purchase another investment property (about the same price as the selling property) during the same year, would the tax situation be different?

7 Replies
Level 17

Selling investment property at a gain

The tax rate will depend on your total income from all sources.

 

If you do a 1031 exchange, and exchange one investment property for another, you can defer any gains until you sell the replacement property.

 

1031 exchanges have to be set up prior to selling the investment property and all monies get put into an escrow account to pay for the replacement property...be sure to let your realtor and title company know if you are considering a 1031 exchange.

Level 2

Selling investment property at a gain

Lisa,  

 

That would be good news to me, if you can please site your authority.  5 years ago I sold an investment  rental property in a 1031 exchange and obtained a replacement rental property, deferring the gain.  It operated for several years as a rental.  I converted it to my residence 1 January 2019.  I have been thinking that I must pay tax on the previously deferred gain not when I sell it but upon conversion to my residence.  Am I wrong?

 

Susan

Level 2

Selling investment property at a gain

Lisa,  

 

That would be good news to me, if you can please site your authority.  5 years ago I sold an investment  rental property in a 1031 exchange and obtained a replacement rental property, deferring the gain.  It operated for several years as a rental.  I converted it to my residence 1 January 2019.  I have been thinking that I must pay tax on the previously deferred gain not when I sell it but upon conversion to my residence.  Am I wrong?

 

Susan

Highlighted
Level 11

Selling investment property at a gain

I know you would like to see chapter and verse from the IRS code but not sure it is spelled out. 

Here is a web article from a  company the facilitates 1031 transactions. It suggests two years will satisfy the 1031 guidelines.

https://atlas1031.com/blog/hold-time-prior-to-converting-rental-to-primary-residence/

 

Level 20

Selling investment property at a gain


@Bees wrote:

I know you would like to see chapter and verse from the IRS code but not sure it is spelled out. 


Here you go - Rev. Proc. 2008-16:

 

https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

Level 7

Selling investment property at a gain

Thanks for the IRS link, it does help clarify so much of my doubt. It could get tricky when dealing with investment property especially when profits are involved. Should you proceed at a wrong timing, you could instead suffer losses at the end of the day.

Level 15 pk
Level 15

Selling investment property at a gain

Having gone through this interesting  comments and generally agreeing with  everything said so far, I would just like to add  that loss at disposition  of income property is not always  bad.  This is because  the all the gain is not treated as  capital gain --- the portion of the gain attributable to accumulated  allowable depreciation is treated as ordinary gain  ( at your marginal rate ) any remaining gain is treated as Capital gain.  At the end of the day what an investor  in real-estate  should be looking at after tax return.

On one of my 1031 exchanges  ( land with large gain ), the received property ( rental property ) when finally disposed of gave me  a small gain   before considering suspended losses, resulting a small loss  -- and hence there was no depreciation recovery required and I ended up making a reasonable return on my original  investment ( on the land )

I am now not so convinced that 1031 exchange is a good idea , especially  in high priced California property -- the market movement is too much over a 10 year period -- that is my two cents