a rental property
My father is considering selling his rental property.
He's had the property for over 30 years and has taken full advantage
of the depreciation factor. Besides a 1031, what other options are
available to him to lower or minimize his long-term capital gain?
And what percentage of taxes could he expect to pay? The property
has appreciated nearly 50-fold, if one believes the going market
rate in the surrounding neighborhood. -- Jimmy
Short of death or Section 1031, it's hard not to pay taxes.
If your father were to pass away, then the value of
the property is stepped up to its value at his date of death. That
solves the tax problem, but it's not good tax planning.
If your father wants to continue his investment in
property, he can certainly Section 1031 the fully depreciated rental
for another property. Section 1031 involves the exchange
of rental property for similar rental property without having
to pay capital gains on the sale of the property. As an alternative,
your dad might want to consider borrowing against the existing property
as a way to finance the acquisition of additional properties.
For example, if the current property is worth $500,000,
he could easily borrow several hundred thousand tax-free to purchase
additional properties. This way he retains control of the existing
property and its continuing appreciation, and has the ability to
acquire additional properties. It's practically the same as the
like-kind exchange of the existing property without the transaction
costs of the sale. Of course, other factors may influence the sale
such as future prospects of the property, liquidity needs, etc.
If the property were sold, your dad would pay tax
on the depreciation he claimed at 28 percent and would pay capital
gains tax at 15 percent on the remainder of the gain. If your dad
had capital losses (for example from stock trading), he could offset
these losses against the gain and reduce the amount he pays tax
on at the 15-percent rate and, assuming enough losses, cut into
the 28 percent gain.