FBG Tax Guys: Capital Gains on Selling a 2nd Home (1 Viewer)

So I bought a house in Columbus in 2002, and then moved to Cincinnati for work in 2010. With all of the real estate market issues, I've been unable to sell it - thus I became a landlord and rented it for the last 7 years.  I rented to one family over the duration of 7 years, and we didn't really make any money on it.  The rent was fair market price, and any profit we made went back into maintenance of that property (appliances, siding work, replacement windows, lawn care, etc).  With the market having come back around, we were able to sell it quickly for full list price ($10k more than we paid for it).  I was told we would have to pay Capital Gains Tax on the sale of this house as it's not our primary residence.

My question for the guys smarter than me on this board is this, how will the tax be calculated?  Is it based on the difference/profit made from the sell vs the initial buy ($10k), or do we need to dig into the rent and maintenance dollars over the last 7 years?  I know that while we rented it, our taxes showed we took a loss all but one year, and that year we nearly broke even.  My FIL and his sister believe we'll likely pay so much in taxes on the sale that any money we may receive from selling the house is gone.  I'm thinking if it's 15-25% of the $10k, then it's manageable and not a big ordeal.  But that's me being naive and a Holiday Inn Express financial guru with Google access.  

Anything I should expect as far as RE Capital Gains Tax goes? My wife wants me to seek out a financial advisor to help guide us through this situation.  I told her I know just the place, hence I'm posting here!  

Any advice, thoughts, concerns, sarcasm welcome and expected.

Did you depreciate it?  You should have.  If so, you may have recapture to deal with.  

You pay tax on the gain. So it will be your sales price less any selling costs and the basis of the property. Your basis is basically what you paid for the property less any depreciation that was deducted plus any capital improvements (if you deducted these as repairs, maintenance, etc then you cannot add them into your basis). If you use some kind of tax software to prepare your return it should walk you through the process. 

What are you doing with the proceeds from the sale?

If you are going to reinvest, you should look into a 1031 like kind exchange to avoid paying CG tax. A tax professional or a competent realtor would be able to explain 1031 to you.

Not asking about depreciation of the rental property or other deductible expenses (Cleaning & cleaning supplies, maintenance & related supplies, repairs, utilities, insurance, travel to & from the property, management fees, legal & professional fees, commissions, taxes, tax return preparation, lease cancellation costs, advertising, real estate taxes, mortgage interest), because I presume you knew what you were doing during  the 7 years you were a LL.  

I think that I used this calculator to help get me oriented on what to be looking for.

https://apiexchange.com/capital-gain-tax-calculator/

You will also need to read up on what technically counts as an improvement or not.

You will have to pay on the gain on the net basis of the property, as well as on recaptured depreciation.

otello said:

Did you depreciate it?  You should have.  If so, you may have recapture to deal with.  

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I could be already misremembering, but I believe that you have pay on the recapture whether you actually depreciated or not.

BobbyLayne said:

What are you doing with the proceeds from the sale?

If you are going to reinvest, you should look into a 1031 like kind exchange to avoid paying CG tax. A tax professional or a competent realtor would be able to explain 1031 to you.

Not asking about depreciation of the rental property or other deductible expenses (Cleaning & cleaning supplies, maintenance & related supplies, repairs, utilities, insurance, travel to & from the property, management fees, legal & professional fees, commissions, taxes, tax return preparation, lease cancellation costs, advertising, real estate taxes, mortgage interest), because I presume you knew what you were doing during  the 7 years you were a LL.  

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The OP made it sound like the property was already sold. Can you do a 1031 exchange after the property has already been sold or does the process need to be setup before selling the property? 

byoder said:

The OP made it sound like the property was already sold. Can you do a 1031 exchange after the property has already been sold or does the process need to be setup before selling the property? 

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Sorry...It's not sold yet.  We're in the process of selling it now.  I'm not interested in pursuing another rental property, so I'm not certain the 1031 Exchange would benefit me.  I've considered it, but nothing I want to get back into right now.  With that said, the definition in the Exchange states "like-kind" - does that mean a similar type of property, or just another investment in general (like an IRA or similar)?

Peak said:

Sorry...It's not sold yet.  We're in the process of selling it now.  I'm not interested in pursuing another rental property, so I'm not certain the 1031 Exchange would benefit me.  I've considered it, but nothing I want to get back into right now.  With that said, the definition in the Exchange states "like-kind" - does that mean a similar type of property, or just another investment in general (like an IRA or similar)?

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Gotcha. My understanding is that it has to be a similar type of investment/property. I've seen people get into some gray areas with the definition of "like-kind" but I don't think an IRA would qualify. I'm sure BobbyLayne would know better than I do, though. 

Long Ball Larry said:

I think that I used this calculator to help get me oriented on what to be looking for.

https://apiexchange.com/capital-gain-tax-calculator/

You will also need to read up on what technically counts as an improvement or not.

You will have to pay on the gain on the net basis of the property, as well as on recaptured depreciation.

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Interesting link.

I ran some quick numbers in there, leaving Deprecation and Improvements at $0 and I ended up with a negative value for Capital Gain Tax Due.  Does this mean we wouldn't owe Capital Gains Tax?

If I adjust Depcration to $5k and Improvements to $1k, then my Capital Gains Tax is only $500.  Obviously I'll need to pull Rental Info out of our tax software to confirm the numbers (adjust accordingly), but I don't think this is too far out of line.

Looking at these numbers, I also get the sense we should've priced it higher!  

byoder said:

Gotcha. My understanding is that it has to be a similar type of investment/property. I've seen people get into some gray areas with the definition of "like-kind" but I don't think an IRA would qualify. I'm sure BobbyLayne would know better than I do, though. 

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I wouldn't think it would, but that wording looked a little "loose" for this layman.

IRS fact sheet on 1031 Exchange

You don't have to have the new replacement property identified at the time of the sale, but for practical purposes, you need to move quickly. You have to designate or identify the 1031 Exchange property within 45 days of the close of the disposed property. That doesn't mean you have closed on the new property but you have to have something in writing. You may have up to 3 replacement properties identified, and they can be worth up to 200% of the disposed property. Here's the break down on the new identified exchange property:

https://apiexchange.com/identification-rules/

@Steve Tasker

I have posted this in a few other tax questions (some of them much more complex then this one) but you really need to consult your accountant/tax adviser and not rely on what you learn on a message board for fantasy football.  

Redwes25 said:

I have posted this in a few other tax questions (some of them much more complex then this one) but you really need to consult your accountant/tax adviser and not really on what you learn on a message board for fantasy football.  

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Do you presume this is the extent of the OP's knowledge seeking? I mean I guess it could be...but I always figure when people ask these types of questions they're looking to add to their baseline knowledge. Along with their own research. Then when they consult with their CPA or RE lawyer, they can at least follow along somewhat as they seek expert advice.

I get what you're saying Red, but I presume people have expert advice available. Anyone relying on the musings of an internet chat board would be a fool. I do think the general population is less than inspiring, but I find with only a few notable exceptions, FBGs members seem like reasonably intelligent folks.

I try to answer tax or accounting questions with a general slant towards the correct information but sufficiently ambiguous that they might naturally be curious to learn more about it. But I don't think people actually read it & presume it must be gospel because it was on the internet.

BobbyLayne said:

Do you presume this is the extent of the OP's knowledge seeking? I mean I guess it could be...but I always figure when people ask these types of questions they're looking to add to their baseline knowledge. Along with their own research. Then when they consult with their CPA or RE lawyer, they can at least follow along somewhat as they seek expert advice.

I get what you're saying Red, but I presume people have expert advice available. Anyone relying on the musings of an internet chat board would be a fool. I do think the general population is less than inspiring, but I find with only a few notable exceptions, FBGs members seem like reasonably intelligent folks.

I try to answer tax or accounting questions with a general slant towards the correct information but sufficiently ambiguous that they might naturally be curious to learn more about it. But I don't think people actually read it & presume it must be gospel because it was on the internet.

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Think general advice makes sense but digging into 1031 exchange is something he really needs to discuss with a tax adviser, which you of course suggested as well.  

Redwes25 said:

Think general advice makes sense but digging into 1031 exchange is something he really needs to discuss with a tax adviser, which you of course suggested as well.  

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Yeah, what I was going for there was a "here's a good way to handle this" introduction without being comprehensive.

Tip for the OP:

1031 is a simple concept but complex because of specific nuances; find someone who's been doing it for 5-10 years on a regular basis as part of the profession. You def want a SME who is current in their expertise. RE agents are a really good resource because they'll often break things down in a digestible manner, but don't expect them to have the same depth of knowledge of a CPA or attorney who is well versed in the underlying tax code.

BobbyLayne said:

IRS fact sheet on 1031 Exchange

You don't have to have the new replacement property identified at the time of the sale, but for practical purposes, you need to move quickly. You have to designate or identify the 1031 Exchange property within 45 days of the close of the disposed property. That doesn't mean you have closed on the new property but you have to have something in writing. You may have up to 3 replacement properties identified, and they can be worth up to 200% of the disposed property. Here's the break down on the new identified exchange property:

https://apiexchange.com/identification-rules/

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Also keep in mind a "forward" exchange, when you sell then buy, is much cheaper to process, probably less than $1,000.  But when you buy first, then sell, you could be looking at $3,000-$5,000 to process.

Getzlaf15 said:

@Steve Tasker

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I don't really disagree with most of the info posted in here thus far.  It's impossible without knowing the sales price, cost basis, depreciation, etc. 

I do think that he shouldn't even attempt a 1031 exchange without getting actual expert advice.  Way too easy to screw it up.  Besides, sounds like the gain might be small enough to where it might not be worth it anyway.

Steve Tasker said:

I don't really disagree with most of the info posted in here thus far.  It's impossible without knowing the sales price, cost basis, depreciation, etc. 

I do think that he shouldn't even attempt a 1031 exchange without getting actual expert advice.  Way too easy to screw it up.  Besides, sounds like the gain might be small enough to where it might not be worth it anyway.

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This is what I am thinking right now.  We aren't looking at a huge profit (less than $50k), but enough that I want to make sure I can cover taxes at the end of the day and have $$ left over.  

I appreciate the advice in this thread from everyone.  I have an appt scheduled with an advisor tomorrow morning and didn't want to go in looking like an idiot (or at least moreso than I already do  ).  This isn't my area of expertise, so any advice/info to help me understand the general process is helpful.