'My CPA hasn't gotten back to me'

"To purchase the replacement property, I would need to add $20,000 from my savings." (Photo subject is a model.)

Dear Quentin,

I have a certified public accountant who will advise me, but I'm also interested in other opinions.

In 2002, I purchased a rental property for $300,000. During the time I owned it, I paid off the mortgage. In 2022, I sold the property for a net of $800,000 and used the proceeds to buy two other rental properties through a 1031 exchange - one for $500,000 and one for $300,000.

The $300,000 property was out of state. I knew the renter, and everything was going well. Long story short, I sold that property in December 2025 at a $75,000 loss. Now I'm down to the wire on either purchasing a replacement or paying capital-gains tax and depreciation recapture.

It's a bit more complicated than that, because I still own the $500,000 property and have taken a loss on the $300,000 property. To purchase the replacement property, I would need to add $20,000 from my savings.

Alternatively, I could walk away from the deal for the new property (especially since the inspection wasn't great). I'm running out of time, and my CPA hasn't gotten back to me. What might my capital-gains tax and depreciation recapture look like, considering the $75,000 loss I've already absorbed?

Down to the Wire

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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

Dear Wire,

Don't miss your IRS deadlines.

Your CPA should be in the mix for time-sensitive decisions like this. Your $500,000 property is not directly part of this 1031 calculation. And your $75,000 paper loss does not automatically reduce your taxable gain, because you already have deferred gains from the previous 1031 exchange. These are the main takeaways. However, these things get complicated, especially in the run-up to the April 15 tax deadline.

In order to benefit from a capital-gains exemption by selling one rental property (your $300,000 rental in this case) and buying another property of equal value (the property with the so-so inspection), you have 45 days to identify a replacement property (which you've done) and 180 days to close on that sale. Those Internal Revenue Service rules are there to prevent people from taking advantage of the 1031 rule.

But there's a catch - isn't there always? There are not 180 days between now and April 15, the final day for you to file your taxes. Because your income-tax return is due before those aforementioned 180 days are up, you must either close on the replacement property before filing, or file for an extension to properly report the 1031 exchange, according to IRS rules.

As for the 45-day rule, that too can get complicated, but in ways that might benefit you. "The three-property rule states that you can identify up to three replacement properties, regardless of their individual or aggregate fair market value," according to the website 1031 Specialists. "You do not need to acquire all three; you can acquire any number of them, so long as each replacement property you acquire is among the identified properties."

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Identifying more than three rental buys

What if you had more than three options, given that you weren't happy with the inspection on the house you found? "You can identify more than three replacement properties as long as the total (aggregate) fair market value of all the identified replacement properties does not exceed 200% of the total (aggregate) gross sale price of your relinquished property(ies) sold in your 1031 Exchange," the company adds.

"The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that they identified," it says. If you don't close on at least 95% of the value of the identified like-kind replacement properties, the 1031 exchange will be void.

Your tax basis is how Uncle Sam keeps track of how much you've invested in a property for tax purposes, and this is adjusted for several things, including deferred gains from prior 1031 exchanges, tax-deductible depreciation and any improvements or additional investments. The "loss" you see is mostly on paper. You may still have a taxable gain depending on the deferred gain carried over from the original 1031 exchange.

Selling your $300,000 property for $225,000 (given you had a $75,000 loss) after the prior 1031 may trigger taxable gains - if the deferred gain exceeds your adjusted basis. A portion of the gain will generally be subject to something called "depreciation recapture," which is taxed at up to 25%, with the remainder taxed at long-term capital-gains rates (15% to 20%, depending on your income-tax bracket).

Without a new 1031 exchange, your federal tax could easily be $60,000 to $90,000, in addition to state taxes and attorney fees. If you go through with another 1031 exchange and buy a new rental, you can defer this capital gain by reinvesting all proceeds. The $20,000 from your savings is "boot" (aka extra) money and taxable immediately. If you abandon the deal, you trigger the taxes on the full gain right here, right now.

Time to find a new CPA.

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-Quentin Fottrell