| Capital Gains on Rental property |
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Arch_horn
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Location: Dallas
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| Capital Gains on Rental property |
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Hello All,
I just started to do some research and found this forum...so here's my first post:
My wife and I own a rental home in Austin. We bought it as our home in 2000 and moved to Dallas in 06...turning it into a rental.
We are now about to have our second child and the market is looking good in Austin, so I'm thinking of selling it.
The Facts:
Original purchase price = $90,000
Improvements made to property = $100,000
Existing mortgage = $187,000 (some old debt was rolled in a refi)
Property Taxes based on value of $266,000
Approximate selling cost = $300,000
We have approximately $60k in debt (some credit card and mostly student loans)
I would also like to make improvements to our Dallas house.
So I'm not sure if it would be best to use proceeds from sell of rental house to pay off all debt...and then at a later date do a construction loan to fix up our existing house.
Or can I roll proceeds into our existing house and avoid or put off capital gains?
Any advice would be appreciated...thanks.
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Fri Jun 01, 2012 2:25 pm |
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oldguy
Senior Member
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Location: arizona
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quote:
Original purchase price = $90,000
Improvements made to property = $100,000
Existing mortgage = $187,000 (some old debt was rolled in a refi)
Property Taxes based on value of $266,000
Approximate selling cost = $300,000
The mortgage, the debt, etc have no effect on the taxes. And you can't roll the proceeds - actually you never could on a rental property, just a personal residence - but that law was cancelled in the late 1990's and repalced by the $500,000 exclusion on cap gains tax on a home.
In your case, you have spent $190,000. And while it was rented the depreciation (or allowed depreciation) reduces the $190,000 each year (probably by about $5000 per year). So your cost basis is $190k minus the about $30k for 6 yrs of depreciation - so your basis is about $160,000.
If you sell for $300,000, your taxable gain is $300k - $160k, or $140,000. But there is also a 'depreciation recovery' tax that you'll be hit with, that law has some ins & outs so you'll have to check it carefully for your particular case - eg, the 15-yr ACRS is exempt.
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Fri Jun 01, 2012 6:00 pm |
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clydewolf
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Cash: $ 50.25
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Joined: 27 May 2012
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| Re: Capital Gains on Rental property |
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Arch_Horn,
Welcome to the forum.
quote:
Or can I roll proceeds into our existing house and avoid or put off capital gains?
No, that is not an option for you.
quote:
The Facts:
Original purchase price = $90,000
Improvements made to property = $100,000
Existing mortgage = $187,000 (some old debt was rolled in a refi)
Property Taxes based on value of $266,000
Approximate selling cost = $300,000
When you say approximate selling cost, I am taking that as the sale price, the price the buyer would pay to own the house.
Selling cost would be what you pay a relator and the cost of things you would do to make the house more salable.
Working through the the tax forms on this is not for the faint at heart. I hope you have kept good records.
Oldguy has given you a good rundown for you to determine your basis and your capital gain. The only change there is that Residential Rental Property is depreciated over 27 1/2 years not 15 years.
The IRS refers to this sale a Section 1250 Sale.
You first determine the taxable gain on the sale of your home.
Worksheet 2, Taxable Gain On The Sale of Your Home in IRS Pub 523 Sale of Your Home, page 16 will do this. http://www.irs.gov/pub/irs-pdf/p523.pdf
The last line of the worksheet provides an amount that you take to another worksheet, the Unrecaptured Section 1250 Gain Worksheet.
This worksheet is found in the Schedule D Instructions, page D-12: http://www.irs.gov/pub/irs-pdf/i1040sd.pdf.
The result there is entered on Schedule D, Line 19. From there you may have to go to the Schedule D Tax Work sheet to determine the amount of your total income tax.
I would suggest to go to a tax professional for the year of the sale.
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Fri Jun 01, 2012 8:09 pm |
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littleroc02us
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So here is what I see. You bought a house for 90k, you made 100k of improvements and your remaining balance is 187k. Yes it may be worth 300k but you have only paid off 3k in the correct me if I'm wrong 12 years you've owned it and have racked up credit card and student loan debt, no offense but I don't think your making wise choices with debt unless you can tell me that by racking up all of this debt you have amassed great amounts of investments??? Sorry if that comes off as harsh, but IMO your first goal should be to sell the rental pay off your debts and stop borrowing money until you get your budget under control.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Jun 01, 2012 8:34 pm |
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Arch_horn
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Joined: 01 Jun 2012
Location: Dallas
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Thanks for all the replies. With a little help from Google (should have done this first), I now realize I can't roll Cap Gains into main house. Thanks for the IRS links...I'll look into and definitely hire a professional.
Regarding the debt issue. It's mainly student loans related to my wife getting her doctorate...but I appreciate the advice.
P
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Mon Jun 04, 2012 2:29 pm |
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trumankent
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Joined: 19 Oct 2012
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Rental property management is being represented as a responsible factor because of the sudden boom in the real estate business.
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Fri Oct 19, 2012 4:45 am |
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jhon6
Member
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Joined: 27 Oct 2012
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States may have different rulings for taxing
capital gains. Before you sell your rental property, you should
understand the state tax rules. If your property is located in a
state other than your primary residence, it would be smart to learn
the rules of both the state of your residence and the state your
rental property resides in. Both states may have a vested interest
in your taxable gain. When in doubt, consult an accountant or tax
attorney.
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Mon Oct 29, 2012 1:46 pm |
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Henryearhart
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You cared for replying and thanks fro that. The Google helped and now I understand the Capital Gains are good for the property. The professionals are to be hired.
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Sat Nov 03, 2012 4:00 am |
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