[Danielle]

In 2013 my husband bought a rental property from his mom for $1, before she passed away. The condo is in Maryland, we live in South Carolina. 

The condo is now up for sale, listed for $220,000.  The realtor’s Sellers Estimated Costs sheet shows us netting $186,000.  Would we need to pay capital gains tax on $186,000 or $220,000?  And what percentage is the capital gains tax?

On top of federal capital gains tax, we have to pay $17,600 in Maryland Non-Resident Seller Transfer Withholding Tax (already factored into the Seller Costs above).

My question is does it make sense to do a 1031 exchange to buy a rental property close to us in South Carolina?    How does the capital gains tax get calculated whenever we go to sell the new rental property?  Does the previously owed taxes get added to the new taxes owed?  And would we have to pay the Maryland tax at that time too? 

We have 1 other rental property, so we’re okay being a landlord.  We’ve just never done an exchange.

[Darron D.]

You will have capital gains on the net proceeds minus $1.

*note, if you had let the property pass via estate, then it would have had a new cost basis, ie if it was worth 100k at transfer, then it would have been net proceeds minus 100k.

1031 will delay the capital gains, viable option.

[Mike]

Your cost basis is not $1.

In the case of a gift, which is what this was, your husband “inherits” his mother’s adjusted cost basis at the time of the property transfer. You then adjust that basis for improvements, depreciation, and selling costs.

Federal capital gains tax is 20%, and you will probably owe an additional 3.8% for net investment income tax.

I personally would consider a 10:31 if I intended to hold the investment properties until the day I die. Otherwise I would just sell the property and pay the tax, knowing that I am probably paying the lowest capital gains tax I will ever see in my life.

[Jason]

Would perhaps make sense to find an agent (in both places) who has done 1031s before, as well as to consult cpa/tax advisor and/or lawyer. Depending on where in MD and where in SC, I can recommend agents who’d be able to assist. (I am licensed agent in NC with Jon Parker Real Estate and invest in real estate in the state as well).

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