housesOn veterans Day (November 11th) you may recall, I posted a blog inspired by one of my fellow gym buddies (a veteran), he revealed his strategy on how to successfully acquire over a million dollars in real estate. Since then “John” has asked me a question that he was hoping I could research. John purchased a rental property in Kansas for $52,000 the property now appraises for $110,000.

His question is three fold:

1. When is the right time to sell?

2. Will I pay a capital gain tax on the profit and, if so, how much?

3. Is their a way to get out of paying the tax?


The Right Time To sell

There are a lot of considerations when deciding when to sell a property.  

  • Obviously one thing to consider is the current state of the market. Do not follow the lemmings and try to sell your property in a panic when the market goes down. Wait and sell your home when real estate is high and you can maximize profits.

  • Another thing to consider is what other investment options are available to you. If there is opportunity to turn that $48,000 (minus taxes, Realtor fees etc, minus tax advantages) into a greater return than what the housing market may offer then it makes sense to explore the idea

  • If you have just been notified that there will be a waste treatment plant, landfill, or other property value downer near your rental property, then it could be a good time to sell. 

Property Gains Tax Formula

Capital gains is basically the sales price ($110,000) minus sales costs (attorneys fees, loan points), original purchase price ($52,000) and the cost of capital improvements, plus depreciation you have previously claimed on the property.  The capital gains tax rate is 15 percent and is one of the reasons that investing in real estate is advantageous.

Postponing the Tax

Section 1031 of the IRS code allows you to sell investment property and use the profits to buy a “like-kind” property without paying any federal taxes. This is called a like-kind or 1031 exchange.  A “like-kind” property does not have to be a good investment necessarily but it does have to be one investment property for another investment property. There are some rules that you will have to follow under the 1031 process,there are requirements to have an objective third party hold the profits on your sold investment property prior to purchasing you replacement property. There are also specific time requirements for identifying and purchasing the replacement property. You have 45 days to identify and 180 days to close the deal on the exchange property. The exchange process has to be initiated before the sale of the property takes place.

Getting out of the Tax

There are ways to not to ever have to pay taxes on the gains. The property could be transferred to family members in a tax free fashion as part of the estate tax laws.

I hope this answered some of his and your questions. I could elaborate on any of these topics so if you would like to know more please let me know.