Q:My brother and I purchased a house in November 1994 for $122,000.00. Our mother rents the house from us.
We’ve decided to put the property on the market this fall.
What kind of tax bill can we expect to have for this house, as it is an investment property?
A: When you sell the property, it will be classified as a long-term investment. If you have taken depreciation, you will need to “recapture” the depreciation.
In other words, if you have depreciated the property down to $50,000, and you and your brother sell it for $250,000, you will pay 15 percent long-term capital gains tax on $200,000, or approximately $30,000. Your share of the tax bill, if you own the property equally with your brother, would be $15,000.
If you and your sibling decide to invest in another investment property, you can use a 1031 tax-free exchange, also known as a starker trust, to exchange this investment property for another (as long as it costs at least as much as the sales price of this property) and defer all taxes owed.
Please consult with a real estate attorney who has had plenty of experience with 1031 tax-free exchanges, since they can be complicated and have strict deadlines that must be met. If you miss a deadline, the exchange is forfeit. For a discussion on the impact this sale will have on your personal tax return, consult a CPA or your tax preparer.