Sell Your Denver Rental & Legally Pay No Capital Gains Tax (Without doing a 1031 Exchange!)

How landlords can sell a depreciated rental and legally avoid the tax bill
Speaker 1:
So I am outside of a duplex in Park Hill. It’s in Denver, near downtown. So just to show you, it’s a front-back duplex in the Park Hill neighborhood. Lots of brick homes here. A lot of them are duplexes like this one. So you have the front unit here and the back unit in the back. What I want to show you is how, if you’re a landlord, like the landlord that owns this property, and you want to get some money out of a rental property that you’ve almost fully depreciated or one that you’ve depreciated enough where if you sell it, you’re going to owe so much in taxes that you couldn’t keep it.

But with rates higher, it’s hard for you to just get a HELOC with a decent rate or to refinance the cash out. So to unlock that equity that you may need in a rental property you have that’s depreciated, I’m going to show you how you can do that and not take a tax hit. There is a way to sell a house that you’ve depreciated as a landlord and not take a tax hit. But here, I’m going to show you quick where we’re at with this one and what we’re doing.

So the landlord or the owner is going to sell this unit. We’re remodeling it for them beforehand. So far, what we’ve done as we’ve removed the laminate floor here in the kitchen and we removed all the existing kitchen cabinets. Other than that, everything’s pretty original. The owner did replace the windows at one point in the past. Here we have a laundry room, but we’re going to put LVP over all this. That’s luxury vinyl plank flooring.

A lot of people think it’s smart to refinish hardwood floors because that used to be the thing, that’s no longer the case. I completely disagree with that. I think it’s the wrong way to go about these because putting LVP over the top of the existing hardware floors is often a little less expensive than refinishing the hardware floors. It’ll look nicer when it’s done because if you refinish these floors, everything’s got to be sanded down. It’s still going to have its imperfections, and if you just put LVP over the top, it’ll look better. It’ll also be more durable, and it will last longer.

So I don’t know if I’m going to be able to catch this in a video, but there’s little gaps between the boards, especially in Colorado with our climate getting dry and wet. These boards will shrink and contract with the seasons, and then they squeak and they collect dirt in between the cracks. If you get LVP, it’s made out of a resin, and it’s basically a fancy-looking plastic that’s stronger than the hardwood, that is easier to clean than the hardwood, that doesn’t expand and contract, and it’s just a better overall product. So we are going to do that. We’re going to paint everything. We’re putting all new fixtures in. In fact, here’s all of our… There’s the bathroom accessories, mirrors. We get almost everything from Amazon. We know what looks best, what’s the best colors. We got our new refrigerator here that we’re going to put in.

Yeah, I look forward to showing you this when we’re done. We’re going to cut this wall down to countertop height, have this stick up, stick over so you can have a little bench here. We’ll have a pendant light that hangs down here that will rough in, and it’ll look nice, open, and new.

I’ll show you what we’re going to do with the bathroom here. Then I will get back to how you can sell your house without taking a tax hit if you’re a landlord. We’ve already removed the old tile. We’re going to put… In fact, there’s nothing really wrong with it. A lot of times, it’s good to just refinish the old tile. It’s just that this faucet was super old and it doesn’t look that great. The only way to get in there and replace this correctly was to remove the tile so we could get into this wall and put new valves in. So that’s what we’re doing. Then we’ll put new tile in, and obviously, we’ll rip this out. I look forward to showing it to you when we’re all done. But new vanity, new toilet, new flooring, all that we’ll be doing, it will look very nice. We are not going to replace the doors. We’re going to paint them white. We’re going to put new door hardware on, and it will give us a really nice, upscale look.

Now, we’re in Denver, and in Denver, the rules say that you can. If you have a duplex like this with one deed, so it’s one property, if you live in one, then you can rent out the other one as a VRBO. But you can’t do that if you don’t live in any of either of the units. So I think the best use of this particular house is going to be as a… We will really fix up both sides, and the future owner can furnish both sides, live in one, and then rent out the other one as a VRBO.

Anyway, that’s what we’re doing. We’re renovating it, then we’re going to sell it. So we’re going to sell it for a higher price. The owner will then reimburse us for the construction at closing. So in this particular case, the owner will pay about $75,000 to us out of the proceeds at closing, but we’re going to increase the value on the backend by more than $150,000. So the seller’s going to put an extra $75,000 in their pocket by doing it this way.

Back to what I started with, the way that we’re going to do this, the owner doesn’t take a big tax hit, is, he’s going to sell this property. He’s going to have a huge tax liability because of the highest sales price and the low basis because he is depreciated the basis down. But then within the same calendar year, so at the time of this recording, we are early June 2023, we’ll get this sold by September, and the owner will have three months then to find a new property, a new rental property that’s less expensive.

So normally you couldn’t do a 1031 exchange where you go into something less expensive, which is why it’s not going to be a 1031 exchange. But we’re going to have all the benefits of a 1031 exchange because he’s going to buy a less expensive property. Then he is going to use bonus depreciation to do a cost segregation study. He’ll buy the new property, do a cost segregation study, and then depreciate out 80% of the value of everything that can be depreciated over, I think, it’s a 23-year period.

So in the cost segregation, they’ll break out the parts of the building that get depreciated over a longer time period and the parts that get depreciated over a shorter time period. Basically, what it ends up being is about half the value of the house. In most cases, you can bonus depreciate out all in one year.

So yes, you have this huge taxable gain from selling this property, but then you go buy a less expensive one. So you can pocket some of your equity from the difference of the two sales prices, and then you’d bonus depreciate out a bunch on the new property in the same calendar year. Now, when you go to do your taxes, you have this huge depreciation to offset your huge gain, and you own nothing in taxes. Essentially, what you’re able to do is a 1031 exchange into a lower-priced property just by structuring it right.

So if you have a rental property that you want to sell, as long as you’re happy getting a new rental property after you sell the one you have and it can be less expensive, reach out to us. I’ll go through all the numbers and show you how we can help you do this, and we can get it done here hopefully by the end of this year still if you reach out quick. That’s the only thing. You can’t do it in the last part of a year. You either have to do it… You got to start this process, I’d say, by August, in order to pull it all off. But reach out to us by putting your address on our website at Again, that’s Put in your address there. We’ll set up a time to come check out your house and go over all your options. Thanks for watching.
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