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Tax Planning/tax on sale of rental prop acquired via 1031


Our renter is about to move out and we are trying to decide whether to sell the rental property or continue to rent it, or to move back in for two years and sell later to get the 121 benefit. If you could tell me the worst case scenario on what our tax burden would be if we sell now: Here are the ballpark figures in 2002 we took an overseas job and rented out our home in city X in California. It was rented out until 2007, when we returned from overseas. Our new jobs were in city Y in California, so we did a 1031 exchange into a new property, and rented it out until the present time. The purchase price for house #1 was 282 thousand. It sold for 420 thousand. We took the entire proceeds and put it into house #2, which we bought for 675 thousand. We have taken depreciation on both rental properties all this time. According to a well known real estate website, our current property could sell for 729 thousand. We are a married couple who files taxes jointly. I have tried to figure out what the tax bill would be by myself and by running the numbers by an accountant who was kind enough to give me a ballpark figure without charge. To really do an analysis and put it in writing he said he would charge 250 dollars per hour. His numbers and mine are very far apart, and my numbers made it clear NOT to sell now, whereas his gave me the opposite opinion, so I am seeking another expert opinion in order to have the best information possible before making this decision.

Gina - Unfortunately, I don't have nearly enough information to give you an accurate picture of your tax burden.  In order to do that, I would have to know all of your income and deductions for the year in which you intend on selling.  The tax rates vary for capital gains depending on your tax bracket, which is determined by a number of factors.  If you paid the CPA $250 and you have reasonable confidence in him, why do you doubt his numbers?

What I can tell you is that your basis in the property is your original purchase price of the first home.  You will have to recapture all depreciation that you have taken.  Once you know what your gain will be, you can then add that in to your total income for the year.

I'm sorry I could not be more helpful.  Specific situations like this do require more in depth analysis and probably are not as good in a forum such as this.

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As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.


I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

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Enrolled Agent, Admitted to Practice Before the IRS, Accredited Tax Preparer, Fellow of National Tax Practice Institute, Certified QuickBooks ProAdvisor (1999-2011), Sleeter Group Certified QuickBooks Consultant, Life & Disability Insurance Agent License (California, Texas, Maine), Real Estate Agent License (California); Many years of continuing education in all these fields.

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