I am selling a rental property this year. I expect to gain about 100K from the sale. Is there a way to not to pay capital gains on that sale? Can I reinvest the money?

[wayneoand]

This property is inherited from my parents in January 2018.  I plan to sell it within this calendar year.  Can I do anything with this money to avoid paying capital gains taxes?  Reinvest in my primary home? Purchase another rental property? If not, how would I calculate the capital gain tax and set it aside?

[SweetieJean]

The property has gained $100k in value since January?

[SweetieJean]

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[wayneoand]

No. Maybe 10K from January.

[SweetieJean]

For inherited property, your taxable gain is the difference between the sales price and the value on the date you inherited the property, not the total sales proceeds.  If you sold the property soon after inheriting it, you can generally assume there is no significant change in value and no large capital gain to tax

[Anonymous · Accepted solution]

talk to a lawyer about doing a 1031 exchange.  in essence this requires you to invest the proceeds in other rental property.  any cash you receive will be partially taxable.  to avoid any income taxes all the proceeds must be held by an unrelated exchange trustee.  note that there are additional fees involved in doing an exchange.  also note that due to the capital gain exclusion, some of the gain might not be taxed at all.  but this depends on what your income will be for the year of sale.   TT has an estimated tax calculator so if you can enter all your expected income income and itemized deductions for 2018 with and without the $100K capital gain, you get an idea of what it will cost you in taxes  it may not be worth it due to the fess involved.  What I can't tell you is what the amount of those extra fees will be.   also don't forget that there will be costs in selling the property such as brokerage, professional, title cost, transfer fees, etc. that will reduce the taxable gain.     

[Hal_Al]

We need to first answer the question you haven't asked: What is your cost basis for calculating your capital gain? The cost basis in inherited property, for tax purposes, is the fair market value (FMV) on the day of death of the previous owner. It doesn't matter how much your parents had invested in the property or how much depreciation they claimed over the years.

It's unlikely that you will have a capital gain, selling in the same year you inherited the property. After deducting the expenses of sale (e.g. realtor commission), you will most likely have a deductible capital loss.

That said, the only way to avoid a capital gain on the sale of investment real estate is a "like kind exchange" (see reference at SweetieJean's answer). A like kind exchange requires that a very specific procedure be followed, involving a coordinating agent. It's not just a matter of reinvesting the money.

[wayneoand]

I am a little confused.  the first paragraph talks about FMV which was 160K when my last parent passed away.  The value of the property now is about 300K making the capital gain about 140K.  However, you also said that I would not pay capital gains if I sold the property within the year I inherited it.  So which answer is the correct one?  

[Hal_Al]

What I meant was that it is unlikely that the property has increased in value, enough to be sold for a capital gain. There is no special rule for selling inherited property within the first year

You seem to be saying that the property has increased $140,000 (88%) since you inherited it in January.  But earlier you said it had gained maybe $10,000.  Either way, if you sell the property for more than the FMV, on the date of death, you will have a capital gain

[wayneoand]

From the death of my mother and through the probate period, the property increased $140.  I officially inherited the property in Jan 2018.  So from what I understand, if I sold it by the end of the year, my capital gains would be calculated from the value of Jan 2018 to the sale date in 2018.  The capital gain would small and possibly be offset by the sales expense that I could apply to the capital gain.  Please verify.  

[SweetieJean]

Yes, as I indicated in my comment above.

[Hal_Al]

No. The cost basis is the FMV on the date of your mother's death*; not Jan. 2018 when you finally got ownership. This assumes your mother died after your father.

* Where the decedent's executor makes the alternate valuation election, then basis will be determined as of the date six months after the date of death (or, if the property is distributed or otherwise disposed of by the estate within the six month period, the date of distribution or other disposition).

[SweetieJean]

HalAl is correct. I had assumed Mom died in Jan 2018.

[wayneoand]

So what is your opinion specifically? I will owe taxes on $140,000 dollars because the capital gains is calculated from my mother's death?

[Hal_Al]

Yes. Even more, if the $140K doesn't include depreciation recapture. Depreciation is also calculated from your mother's date of death.