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lbellmer
New Member

Most beneficial way to receive funds from sale of rental property

We (married filing jointly) will soon be selling a rental property for $450K.  We refinanced our primary home to finance purchase of the property in 2001.  When well sell the property, can we somehow roll the money received into paying off the mortgage on our primary home without taxation?  Would it be better to accept the cash payment(s) over a 2 year period (ie. $250K 2021 tax year and $200K in 2022 tax year?

4 Replies
MMTaxMM
Level 10

Most beneficial way to receive funds from sale of rental property

If you really want to avoid immediate taxation on this deal, you might look at a 1031 exchange....

https://www.irs.gov/pub/irs-news/fs-08-18.pdf

"Rolling" the money received into paying off something else won't work. 

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Mike9241
Level 15

Most beneficial way to receive funds from sale of rental property

in a 1031 exchange, all the proceeds from the sale must be held by an independent party. any money you get becomes taxable. the money from the sale is used to buy other real property (rental - can't be a new personal residence).  if interested you need to consult a real estate attorney to make sure everything done conforms to the tax laws. failure results in the sale being fully taxable.  perhaps you should consult a financial consultant. paying off your home mortgage is not necessarily a bad idea even though you have to pay the taxes on the sale. taking the money over two years may also reduce the tax burden.

Carl
Level 15

Most beneficial way to receive funds from sale of rental property

When you sell a rental property, what you do with the proceeds and when you do it has no effect on it's taxability. Other's have mentioned a 1031 exchange. I don't think that's up your alley since you're not looking at acquiring another like-kind rental property as a replacement.

 

Opus 17
Level 15

Most beneficial way to receive funds from sale of rental property

There are no tricks to avoid paying capital gains tax on the sale of a rental property by hiding the money in your personal property. While paying off your mortgage might be a sensible thing to do, it will not help you avoid capital gains tax because, as Carl said, the sale is treated by itself, and anything you do with the proceeds later is up to you.

 

A section 1031 exchange involves “trading” one commercial property for another similar commercial property, and postponing your capital gain until you dispose of the new property.  If this is something you want to do, you need to engage an accountant before you sell the original property, because the section 1031 exchange has to be arranged in advance.  If you are getting out of the rental real estate business, you do not want to do a section 1031 exchange and you just need to pay the tax.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

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