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Any thoughts on this book?
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Coach
I like it, so you’ll have a paid off primary residence. Thats what I do as a risk mitigation strategy. I can always fall back to utilities and food as my monthly expenses. It sounds like you want to roll everything above 500k into a partial 1031 exchange. Which opens a slot for a primary residence loan. Which would be the place you buy cash, which kinda sucks because you won’t have a loan to get the lowest rate. The downside is the rental you buy with the 1031 partial will get a higher rate and likely require 25% down, but there are newer programs through I think Fannie Mae where you can get 4 units with a lower down. I don’t understand the renting a place, increasing property tax idea. You can also tax harvest any capital losses, say I bought 1 bitcoin at 65k and it’s 46k. I can sell and use that to offset my capital gain. You’d need a large loss to really help in this situation though. 1031 is the way to go.
Coach
You can do a partial 1031 exchange if it was used for a business or partially rented. I haven’t done a partial 1031, but it’s really not that complicated to do a rental agreement for a bedroom rental or down stairs. Which makes it a partial investment property. Might want to discuss the details with an accountant. What I think they will say is once you apply the 1031 to that new primary residence you can’t live there as a primary residence. You’d have to wait out the time frame before moving in. Which I guess is where that apartment comes in.
Have you lived in your primary residence for at least 2 years? If so, I think you should be exempt from cap gains.
Yes. The exemption is capped at 500k for couples. We’re going to surpass that.
Ah I see. Have you looked into a 1031 exchange?
I suspect there must be some limitation. Just like there are time constraints when you move in to your house to declare it as a “primary residence”.
1031 exchange on the surplus?
Subject Expert
How much is the gain? LTCG is only 15% for most people, so even if you’re looking at $200k or $300k in gains, that’s potentially only $30k or $45k in taxes, which isn’t terrible.
If you want to buy a property and rent it short term, you may be able to use the short term rental loophole to accelerate depreciation and use the losses against your W2 income to reduce your tax burden. That would likely require 6 figures to get started just to avoid paying 5 figures in taxes, so that may be a bit of the “tail wagging the dog”.
Subject Expert
What’s your AGI expected to be?
https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates
Sounds like you would be paying 15% or 20%, assuming you’re a high wage earner.
15% on $3.5m would be $525k, 20% would be $700k, definitely worth looking into ways to offset it. Look into the short term rental loophole. You’ll need to be very strategic and keep close logs of all of your activity. But that loss would only go against W2 income, not LTCG. At the very least, getting your AGI below the threshold to drop your LTCG rate would be highly advisable - spending $175k on a STR and walking away with an asset that produces income would be much better than just handing that $175k over to the government.
There may be some other strategies (oil & gas investments, conservation easements, opportunity zones), but I feel like there’s a less direct path to cashflow and ROI compared to a STR.
Talk to a tax attorney or CPA on your county. Loopholes usually require time - but they will know the best route.
If you buy the next home with the proceeds within 180 days you avoid capital gains. There’s plenty of exemptions.
Not on a personal residence..