Avoid Capital Gains on Rental
I bought my first house in May 2012. I moved into my second (current) house in November 2014. After I moved out of my first house, I began doing repairs on it, and started renting it out around May of 2015. So I lived in my first house for about 2.5 years and have been renting it for about 1.5 years. The house has almost doubled in value. I bought it foreclosed for 70,000 and its worth around 130,000. I really want to stay in the rental property business for a while, but I know there is a law/rule/exemption for selling a house if you've lived in it for 2 out of the last 5 years, which I have. If you meet that requirement, you don't have to pay capital gains on the profit from the sale.
If I sold the house now I wouldn't have to pay capital gains, but I would then want to buy another house as a rental. Also, right now I don't even get to depreciate the full value of the house since i bought it at 70,000. So the question is, is there any way to keep my current rental and avoid paying capital gains if/when I sell it later in life and maybe also depreciate based off the home value instead of purchase price? Could I sell the house to myself or something? I don't know. Any idea what the best thing to do here is? I really don't want to sell the house, just to buy another, but it would save me around 00 in capital gains. Am I missing something?
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While it may not be your preferred outcome, and doesn't eliminate the income, in the event you find yourself in the path described here you have a way to defer gains to the future.
but I would then want to buy another house as a rental
If you sell this house and buy another investment property (within strict time windows: 45 days to written contract and closed in 180 days), you can transfer your basis and defer your gains via what is called a 1031 like-kind exchange
Your question is best asked of a tax expert, not random people on the internet.
Such an expert will help you ask the right questions. For example you did not point out the country or state in which you live. That matters.
First point is that you will not pay tax on 60K, its expensive to transact real estate, so your net proceeds will be closer to 40K. Also you can probably the deduct the costs of improvements.
You implied that you really like this rental property. If that is the case, why would you sell...ever? This home could be a central part of your financial independence plan. So keep it until you die. IIRC when it passes to your heirs, a new cost basis is formed thereby not passing the tax burden onto them.
(Assuming the property is located in the US.)
Just brainstorming here, but my gut feeling is it should be possible to sell your home to yourself with the sole purpose of resetting your basis. Taken at face value it feels illegal, but since I think we all would agree that you could sell your house to a third party and purchase the identical house next door for the same price (thus resetting your basis), why can't you purchase the same home right back? If one is legal, it seems odd for the other not to be. That being said, I have no idea how to legally do it. Perhaps you truly need a third party to step in which you sell it to, and then buy it back from them sometime in the future. Or perhaps you could start an LLC and have it purchase your home from you. Either way, I highly suggest finding an expert real estate attorney/accountant before attempting this, and don't be surprised if you get multiple opposite opinions. I suspect this is a gray area which will highly depend on how tax "aggressive" you are willing to be.
What you are looking for is a 1031 exchange.
www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031
Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
You may also sell your house for bitcoin and record the sales price on the deed with an equal or lesser amount that you bought it for.
Don't let the tax tail wag the investment dog.
There is risk in exchanging this (known) property for another (unknown) property. That risk may be more than 00 worth of risk. Tax considerations are important, but most important is that your investments make money. If you intend to continue as a landlord, you had better be sure you are finding a better deal elsewhere if you are going to trade this property up.
I should also mention that you have a 5 year window in which you need to have lived in the home for 2 years. You have time and might be able to sell for a higher price if you wait a little longer.
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