How A Phone Call Saved My Friend Over $50,000 Using A 1031 Exchange
Sometimes it’s better to be lucky than good, and the timing of a phone call from a friend trying to navigate 1031 exchange capital gains taxes couldn’t have been luckier.
Human Authored by
Daniel Goodwin
A 1031 Exchange Example
My buddy lives in upstate New York, and about eight years ago, he bought a rental house in the Adirondacks as an investment property. He paid $200,000 for it, and it’s provided him with a steady stream of income since he’s owned it. But it comes with the usual landlord’s share of headaches, too, especially given the number of renters that he’s dealt with for a vacation rental. So when a local real estate agent put out a feeler and suggested he could get $375,000 or so for it in today’s market, he figured a near-double over an eight-year period was a nice return, and why get greedy? He started to put the wheels in motion to sell his rental home.
But first, he called me.
And I asked him one simple question: Do you need the money for some reason?
He laughed and reminded me that there’s never a bad time to put $375,000 in the bank, but no, there was no pressing need.
Well, I told him, you can certainly complete the sale. Pay the Federal capital gains tax on the $175,000 gain (in his tax bracket, it would have been the max 20%, or $35,000). Pay the New York State capital gains tax (another $19,075). And walk away with the $320,000 or so that’s left.
On the other hand, he was also free to upgrade to a larger, more profitable rental property in the same part of the state (which seldom goes unrented) by locating a place with a $375,000 price tag, completing a 1031 exchange, and potentially deferring the almost $55,000 in capital gains taxes indefinitely. The better property would be accompanied by a better stream of rental income, some of which he could use to pay a property manager if he was really all that tired of landlord duties. The substantial increase in rental income would more than cover that expense, boosting not only his checkbook but also his quality of life!
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As you can imagine, it didn’t take much convincing, and my friend is better off for it.
The moral of the story couldn’t be simpler here: make sure you’ve exhausted all your possibilities before you incur a hefty tax bill, especially if you live in a high-tax state like New York. Unless you’re facing a screaming need to cash out of a business property, there are usually some good alternatives to enriching your Uncle Sam.
Don’t ever hesitate to give us a call, so that we can talk over some of those possibilities and keep your money where it belongs: in your pockets!
