Finally put my rental on the market this week. Great timing, right? I'm pretty clueless about the tax consequences once I sell it. From what I understand, only the profit I made (sale price minus price I bought it for) will be taxable? Is this true? Would the tax rate be similar to my income tax rate? My tax person mentioned something about depreciation over the years and said my tax bill could be pretty huge, since I've been claiming it for 10 years now. What kind of difference would that make? Just trying to figure out how much I should hold back from my closing check so I don't get a big surprise tax bill next year.
Bump... Accepted an offer yesterday and closing is a week from Friday. Any tax experts want to take a shot at this? If I'm selling for slightly less than what I bought it for 20 years ago, will I still have to pay taxes? Even if I've been taking the depreciation the whole time? I will be taking home about 40K and want to know how much to hold back for a possible tax bill next year.
it's more like profit = sales price - ( ur purchase price - exp claimed on ur tax returns) if ur considering buying another rental property, ur cost basis for the new one will be reduced by the profit from the sale of the first one. if so, no tax due in the tax yr of the sale. u have about 18 mo to make that happen. otherwise, u have to pay tax on the profit.
So if I sold for 108K and I bought it 20 years ago for 110K, there's no profit at all? House is in pretty bad shape and I sold as-is. Definitely not buying another rental until I can afford to pay cash, and that probably won't be until I'm closer to retirement.
what is the total of the depreciation exp that u had claim on ur tax returns? subtract that from ur cost of the rental property, that's ur tax basis of ur property. profit = sales price - tax basis of property
Yeah, so let's say your depreciation was like $50K. It would look like this... 108 - (110-50) = taxable amount (48k gain in this example). I think your tax rate would be the long term capital gains, but would need to check to make sure. As mentioned above, if you're going to use that money to invest in another rental, you could do a 1031 like kind exchange and not pay taxes.
To do a 1031 exchange, you'd have to set it up in advance so the funds go to a 1031 intermediary (which he'd still have time to do). You'll have to pay tax on recaptured depreciation. Lets say you've allocated $10K to land and been depreciating the remaining $100K. 10 years in your accumulated depreciation would be $36K. Since you are selling at a loss, you won't recapture the full amount. Instead you'd recapture $34K minus any closing costs. It gets kind of convoluted depending on other factors with your return, but generally expect to pay a 25% rate on recapture.
So I guess the number I'm missing for this equation is the amount I've claimed for depreciation over the last 10 years (since it's been rented out). Guess I need to get that from my tax person because I actually don't know except that I know she's taken depreciation pretty much every year. I should be taking home about 40K at closing (after mortgage and realtor fees) so I'm just going to plan on earmarking about 10K for taxes just to be safe. Just don't want any surprises next year. Good plan?
I'd hope depreciation was taken ever year (you actually have to recapture it even if you didn't deduct it). If you look at your prior year Schedule E (or 4562) you can see the amount of depreciation taken. Multiply that by 10 and there you go since Real Estate is straight-line depreciation. But yes, holding back $10K should definitely cover any potential tax hit.
Man, I wish I would have seen this thread when you posted it. I could have either talked you in to rehabbing first or just bought it from you. NEVER pay cash for Real Estate. All of that money would be dead equity just sitting there. You can buy 3-5 properties with $110k in cash if you know what you're doing. Ultra-rich people do it this way. Make more than the debt and it's free money.
Okay, finally found the number I was looking for. Been taking depreciation since 2008 for a total of $32,267. Time to test my pathetic algebra skills: sales price - ( original purchase price - total depreciation) = cost basis 107,500 - (110,000 - 32,267 = 77,733) = 29,767 So I should basically expect to pay taxes on 30K. Probably about 15%? I'm going to hold back 5K just to be safe. My refund was $4500 this year, so I may not have to pay anything and I'll just not get a refund next year. Which would be fine with me.
@ima_drummer2k is a strong believer in Dave Ramsey advice, so that's where he is likely getting his idea about buying straight up cash. I like Dave's advice sometimes, but some other times it's just not smart financial advice if you are actually good with money. If you are terrible with managing money then by all means, follow his advice.
Depends on your total income to the rate. 25% is the max, but most people will pay 12% or 22% depending on their marginal tax bracket. Assuming you are Married filing Joint, 22% rate kicks in at about $78K in taxable income (so after subtracting your standard deduction). Don't forget to subtract your closing costs (I'd assume somewhere close to $6K for realtor fee).
Agreed, Ramsey is great for people who need dot-to-dot simple advice on not going into debt. I got tired of his radio show when it became apparent very quickly that 90% of the people there needed marital counseling as opposed to financial advice (Dave, my significant other just won't listen!) But Ramsey is terrible if you can balance your books and are aware of your spending.
found a house that I like (price/value) with a 30% down payment &10 years morg. in mind, the house might needs 100k for update expenses , I'm planning to keep this house for 5 years any advice ?
I intend to live in it, housing prices are inflated here with no sign of slowing down, this house was built in 1970s, 2300 ft 630k nothing special about it except location , would you rather pay more for something fancy~er (900k) because you can or stay rational, life is too short vs. everyone is taking 25 years mortgage sort of clashing thoughts. I have to make a decision by Friday
Have you done the math on what it will be worth after rehab and what your equity will be after 5 years? Get your agent to run comps on what rehabbed houses in the area are worth. Also, if they have it, value growth trends in that area for the last five years. Calculate what it will be worth based on those numbers, then subtract around 15% due to the recession from the awesome year that is 2020.
