2024 selling 2 family Jersey city - 1031 or not? Occupied or vacant?

[Drew Slew]

Hi All, 

I have received a lot of help over the years from the BP community on buying/investing and now im looking for advice on selling. I am looking to offload one of my properties a 2 family duplex in Greenville, Jersey City that I got for 5yrs ago. Quick key points and questions below, appreciate any insights, ideas:

- Bought duplex on a VERY up and coming part of Jersey City, right next to Ocean ave, 2018 for 400k. 7bed 2baths, about 3600 sqft w garage and backyard. Bought it renovated, but in 5yrs not so new anymore as tenants lived it down. Area is growing, most houses sold in front of mine, 1M condo conversion just got built/sold on same street. 20mins to NYC Fidi.

- Now looking to sell around 600k (redfin says its worth over 650k, not sure), with 3.3% 30yr fixed loan w 285k loan still, looking for around 315k+ profit. I could wait as it will go up, but rather scale up and live now out of state.

- Both tenants paid 1850/m so there is some CF but not much as tax/expenses slowly crept up, hower new owner could def do over 2k/month rents.

- Added: new roofing for around 15k in 2019-20 and added a 2nd laundry (washer dryer) so each unit has its own.

- Value adds for new buyer: Potential to make front garage usable (current is very narrow), make backyard nicer, finish off basement and make it livable

Questions: 

1) From tax purposes, what EXACT tax would be on the 315k capital gains? I am FL resident but its sold in NJ. Any other tax other than capital gains? Im estimating total 15-17% tax so total around 50k if not doing 1031 exchange. 

2) With 1031 exchange i know its a million things to know, 45day then 180day rule, 200% rule etc etc but main thing is id be buying out of state condo/land in Miami area and SFH renovatable home in CT stamford area. Dont like the complexity and stress of fidning stuff in 180 days, the potential to get a bad deal sounds worse than having to pay 50k. Happy to be connected to any good qualified intermediary in NJ.

3) I did live in it first year as a primary residence in 2018, but rest 4yrs were all investment property usages on my tax. So probalby doesnt qualify for 2yrs out of 5yrs primary no capital gains tax rule.

4) Want to sell it AS IS (im a licensed realtor so will take the 3%) not sure if any renovations are needed, maybe will touch up wall painting and tidy up backyard/add fence. 

5) Should it be sold vacant or occupied? One tenant is moving out March 1, so i could give other one notice now they on month to month, or just have them be there for carrying costs. Thinking of selling March/April to hit spring market. 

Any other ideas thanks a lot

[Alecia Loveless]

@Drew Slew If you’re not comfortable with the constraints of the 1031 don’t do it. Or you could start it and then back out. Or do a partial one.

I’d leave one unit vacant and the one unit MtM.

[Bill Brandt]

Leave one side empty or you won’t appeal to owner occupants. 

Your profit isn’t $315k. If you sell for $600k and it only costs you $20k because you save $20k in commissions to yourself. You net $580k. You subtract your $400k purchase price and your profit is $180k, (maybe $40k in federal taxes?) even though you might walk with $295k in cash. 

This is before you add any capex to your cost basis. BUT. You will also have to recapture the 1 year times half and 4 years times 100% of building in depreciation. Guessing that’s $320k building value you have 3.6% times $160k times 4 years plus 3.6% times 5 years.  That’s about $52k @ 25% or an additional $13k in taxes. Don’t forget state income tax on top of that. 

So my VERY rough ballpark would be $40k federal, $13k depreciation recapture and whatever your state income tax is on $180k stacked on top of your current state income. 

Ps. If you can roll all of that to Florida and eventually move there you can consider the state income tax savings icing on the cake. 

[Dave Foster]

@Drew Slew, Some good news for you on the 1031 front.

1. Your profit is not $315.  That is your eqity.  Profit is determined by taking your purchase price of that property and adding capital improvements and subtracting depreciation of 4 years.  This is your adjusted cost basis.  Then subtract this basis from your net sales price (contract minus closing costs).  That is your profit.  The depreciation recapture part will be at 25% and the capial gain will probably be 15% fed plus state.  You've still got a significant profit either way.  @Bill Brandt gave you a pretty good guestimation

2. All those pesky little rules about the 1031 - the most important one is to use the QI.  If they're good they'll be your guide.  And they do not have to be located in any particular location.  Most 1031s these days start in one state and end in another anyway.  Most of the QIs like us here on BP all have a national footprint. So performing the 1031 is very easy.  Buying out of state is fine.  Buying any other class of investment real estate is fine.  

3. You've rightly identified the main issue - can you make that work within the time constraints?  What we see is that those constraints, while real, are not as big an obstacle as they feel.  We do internal audits on our exchanges.  And even in the toughest time in this market to buy, our clients were still completing successful 1031 exchanges well over 90% of the time.  You do need to be focused.  And you may want to try to get your new property under contract even before your old property sells (it's fine to be under contract before your old property closes).

4. But the biggest thing to remember is that there is no penalty (other than the exchange fee) for starting and not completing an exchange.  If you can't find properties you like then don't turn in a 45 day list.  Your exchange will die on day 46 and you get your proceeds back.  And pay the same tax you would have at the same time you would have.

5. Oh, and one more thing.  You have the option of taking that realtor commission at closing (you'll pay ordinary tax on it).  Or you could not take a commission and leave that in the 1031 exchange where it will be tax deferred.  If you've got losses or a favorable tax situation then take the commission by all means.  But if you've got an income problem (as in too much) you can forgo the commission and save some tax dollars which can then be used to buy more real estate without paying tax on it first.

[Drew Slew]

Quote from @Alecia Loveless:

@Drew Slew If you’re not comfortable with the constraints of the 1031 don’t do it. Or you could start it and then back out. Or do a partial one.

I’d leave one unit vacant and the one unit MtM.

Thanks a lot Alecia, appreciate it. I am thinking of doing one vacant and one occipied, that allows easier showing, renovating a bit the vacant unit and helping w carrying costs. Occupied tenant will be on m/m lease so if buyer wants to change its easier. 
With the 1031 exchange it sounds like i could start it and then if it doesnt pan out im at the same point as original and just pay taxes in 2025 on the capital gains. 

[Drew Slew]

Quote from @Bill Brandt:

Leave one side empty or you won’t appeal to owner occupants. 

Your profit isn’t $315k. If you sell for $600k and it only costs you $20k because you save $20k in commissions to yourself. You net $580k. You subtract your $400k purchase price and your profit is $180k, (maybe $40k in federal taxes?) even though you might walk with $295k in cash. 

This is before you add any capex to your cost basis. BUT. You will also have to recapture the 1 year times half and 4 years times 100% of building in depreciation. Guessing that’s $320k building value you have 3.6% times $160k times 4 years plus 3.6% times 5 years.  That’s about $52k @ 25% or an additional $13k in taxes. Don’t forget state income tax on top of that. 

So my VERY rough ballpark would be $40k federal, $13k depreciation recapture and whatever your state income tax is on $180k stacked on top of your current state income. 

Ps. If you can roll all of that to Florida and eventually move there you can consider the state income tax savings icing on the cake. 

 Thanks a lot Bill, very helpful. So your estimate is (purchase price 400k in 2018, selling at 600k 2024) to be around 180k capital gains total and taxes on the 180k (lets say 15% rate so thats 27k), 40k federal capex, 13k depreciation recapture? so around 40+13+27=80k total taxes? seems crazy hight for only 180k profit. I was AT MOST looking at 50k total. 

Then a 1031 exchange is def needed. Im trying to guesstimate properly what my actual taxes on the sale would be to see if a 1031 is worth it or just use the cash from sale and invest later/stocks etc.

Thanks

[Drew Slew]

Quote from @Dave Foster:

@Drew Slew, Some good news for you on the 1031 front.

1. Your profit is not $315.  That is your eqity.  Profit is determined by taking your purchase price of that property and adding capital improvements and subtracting depreciation of 4 years.  This is your adjusted cost basis.  Then subtract this basis from your net sales price (contract minus closing costs).  That is your profit.  The depreciation recapture part will be at 25% and the capial gain will probably be 15% fed plus state.  You've still got a significant profit either way.  @Bill Brandt gave you a pretty good guestimation

2. All those pesky little rules about the 1031 - the most important one is to use the QI.  If they're good they'll be your guide.  And they do not have to be located in any particular location.  Most 1031s these days start in one state and end in another anyway.  Most of the QIs like us here on BP all have a national footprint. So performing the 1031 is very easy.  Buying out of state is fine.  Buying any other class of investment real estate is fine.  

3. You've rightly identified the main issue - can you make that work within the time constraints?  What we see is that those constraints, while real, are not as big an obstacle as they feel.  We do internal audits on our exchanges.  And even in the toughest time in this market to buy, our clients were still completing successful 1031 exchanges well over 90% of the time.  You do need to be focused.  And you may want to try to get your new property under contract even before your old property sells (it's fine to be under contract before your old property closes).

4. But the biggest thing to remember is that there is no penalty (other than the exchange fee) for starting and not completing an exchange.  If you can't find properties you like then don't turn in a 45 day list.  Your exchange will die on day 46 and you get your proceeds back.  And pay the same tax you would have at the same time you would have.

5. Oh, and one more thing.  You have the option of taking that realtor commission at closing (you'll pay ordinary tax on it).  Or you could not take a commission and leave that in the 1031 exchange where it will be tax deferred.  If you've got losses or a favorable tax situation then take the commission by all means.  But if you've got an income problem (as in too much) you can forgo the commission and save some tax dollars which can then be used to buy more real estate without paying tax on it first.

 Dave, thanks a lot for the comment, will PM you about the 1031 exchange so we can go over details, main concern is time and what it would costs. 

As I mentioned, my main goal now is to actually figure out what taxes would be on a potential 600k sale to see if 1031 is worth it. 3% realtor commission is 18k so thats pretty good if it can be added to 1031.

[Dave Foster]

@Drew Slew, received and replied :)

[Bill Brandt]

Drew,

I said $180k gain instead of $200k gain because I assumed selling would cost you $20k, and that’s not taxed.

You DO NOT owe $27k capital gains tax and $13k depreciation recapture (both federal taxes) AND the $40k. That was me adding those 2 numbers together (27+13k = 40k). All you’ll owe on top of that $40k to the feds is however much your state wants. 

[Drew Slew]

ok great thanks, so the 50k ballpark total tax seems right then, 40-50k

[Drew Slew]

@Bill Brandt @Dave Foster forgot to add one detail, thanks for the continued help:

- i have a HELOC on this property, owe about 45k on that. So would that have any effect on taxes to be paid or its just 2nd mortgage to be paid upon closing, making capital gains less (285k mortgage+45k HELOC=330k loan-600k sales price=270k total capital gains)

- I am reading that even as a FL resident selling a NJ property i have to pay 8.97% NJ state capital gains tax plus a 1% realty transfer tax.. 

- so to summarize: 15% federal capital gains tax, 8.97% NJ state tax, 1% realty transfer tax, depreciation recapture and whatever other costs for closing.

https://www.nj.gov/treasury/taxation/documents/pdf/guides/Bu...

[Bill Brandt]

What you owe doesn’t affect taxes at all. 

To avoid NJ taxes you’d have to do a 1031 to a new property in a tax free state. 

So you’d save $40k in federal taxes AND $20k in NJ taxes if you did an exchange to Florida. Maybe buy a 1.2mil duplex on the water and live in half. Or a $800K fourplex. 

[Dave Foster]

@Drew Slew, yep,  What @Bill Brandt said.  Except in this area duplexes on the water are 1.8...per side!

[Julio Gonzalez]

@Drew Slew Here's an article you may also find helpful if you decide to go the 1031 exchange route.

https://www.biggerpockets.com/forums/311/topics/965199-requi...

[Shawn Mcenteer]

Hi @Drew Slew happy to hop on a call dive deeper with your situation.  I will let you know most multi family properties being sold in todays market are doing things backwards in terms of condition and tenancy.  It is not exactly a straight forward one way or another answer in our market.  I would need to know more about your situation to give more guidance.  

[Drew Slew]

@Shawn Mcenteer sounds good thanks a lot Shawn, lets PM here

[Drew Slew]

In terms of taxes, this is what I got from my CPA< but i dont think its still right, seems VERY high. Not seeing the 1% exit tax for NJ and all the closing costs too. so it would be around 100k total to just sell a place with 340k-ish profit. cant be

Selling price: 649,000

Purchased: 395,000, loan outstanding: 285,000

TAX:

Federal; $64,000

NJ: $20,000

Federal tax breakdown:

Cost basis: $395,000

Proceeds: $649,000

Depreciation Recapture: $56,000

Net taxable gain: $310,000

Federal Tax Breakdown:

Depreciation Recapture taxed at 25%: $14,000

Gain from sale taxed at 15%: $38,100

Net investment income tax of 3.8%: $11,500