Your capital gains rate will be 15%, you are correct. The tax figures in your post are also accurate, being $78,000. This is assuming you have not taken any depreciation on the property. Remember, that will reduce your basis. The IRS also tracks this, so if you "overlooked" your depreciation then you would receive notice a couple years after your tax return indicating an outstanding balance due.
You will only pay the capital gain on your sales price less basis, less cost of sales, so if you are paying a $40k broker fee so that will reduce your tax liability accordingly.
There is a way to defer (not avoid) your capital gain - this would be a section 1031 exchange. Your sale would have to be structured as a 1031 exchange and the sales proceeds would have to go to a "qualified intermediary" for safekeeping until you found. In addition, the property you purchase will have to be at least the same sales price as your other property you gave up.
Section 1031 transactions
have to meet strict time deadlines set in place by the tax code. For example, you would have to identify replacement properties within 45 days of the close of your sale, and then close on the sale in no later than 180 days. If you are one day off on either of the timeline, the whole transaction is invalidated.
I would suggest contacting a real estate professional who specializes in 1031 exchanges, or a tax advisor. Keep in mind that your tax professional cannot be your "qualified intermediary."
Based on what you have told me about the transaction, it seems that a 1031 exchange would be challenging, at best - unless you found a buyer who wanted to trade you directly and your bank had no issues loaning you the money to fund your new purchase. Keep in mind that your 1031 property could not be a second home or primary residence; it would have to be an investment property.
I'm sorry that I don't have better news. I wish it were different - however, be glad that you asked about this before closing a deal. I would highly consider selling for a higher price so that you will have cash to pay your tax bill.
If you sold for the current value of $850,000 you would have a tax bill of $91,800. ((850-40-80-118)*.15)
After paying your broker's fee and paying off your loan balance, you would have $90,000 cash (850-720-40) and that would give you almost enough to pay your tax bill.
You're going to need to hold out for at least $850, unless you have significant cash reserves. Hope this helped, and I'm truly sorry if it's not the optimal situation for you. Here's a site about section 1031 exchanges;
please note, I do not know these people personally so I cannot endorse them. Further, I don't make recommendations of who to use - any reputable broker or tax professional in your area should be able to make a referral to a 1031 qualified intermediary. If this helped, then rate my service as "excellent" so that I can be compensated for assisting you today. Otherwise, click "reply" or "continue conversation" for continued dialog with me.
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