Tax consequences of selling a rental?

zone_8grandmaJuly 19, 2007

This is a "what if" scenario. When the time comes, we WILL see a professional. I'm just trying to get a general picture at this point.

If we sell a rental house (there's no mortgage), I know we pay a capital gains tax (15% I believe). After we pay that 15%, will the sale push our income into an upper bracket?

Or does paying that 15% capital gains tax fulfill our tax obligation?

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devorah

The 15% will cover your tax obligation as I understand it. Of more concern to me, if/when I am in your situation is that the basis in your house has been diminished by all the depreciation you have taken, so even at 15% it might represent quite a lot of money. We are looking at this problem about 6 years down the line. We aren't sure that we want to live in the house that we bought for our retirement and are now renting out.

    Bookmark   July 19, 2007 at 7:22PM
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gina_in_fl

The depreciation bites you in the butt. While you're saving a few bucks on your current taxes, you are lowering your basis. In the meantime, inflation and "crazy idiots" overpaying for houses are pushing the sales price up. So you'll have to figure your capital gains on the full sales price. If they haven't changed things, as long as you're claiming it as a rental, they (gov) will ASSUME depreciation whether you took it or not. (might be outdated info.. check w/an accountant)

    Bookmark   July 20, 2007 at 12:10AM
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zone_8grandma

Oh yes, it's been depreciated down to zero. When it sells, we'll be paying the capital gains tax on the full sales price (in addition to realtor fees and closing costs). I told DH that we'd probably clear about 76% of the sales price (15% capital gains tax, 7% realtor fees, 2% closing costs).

Yes, when the time comes, we will see an accountant. But until we really need the funds, it doesn't make much sense to sell it.

    Bookmark   July 20, 2007 at 9:42AM
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cmarlin20

he depreciation bites you in the butt. While you're saving a few bucks on your current taxes, you are lowering your basis. In the meantime, inflation and "crazy idiots" overpaying for houses are pushing the sales price up. So you'll have to figure your capital gains on the full sales price. If they haven't changed things, as long as you're claiming it as a rental, they (gov) will ASSUME depreciation whether you took it or not. (might be outdated info.. check w/an accountant)
Wouldn't those "crazy idiots" help the rental seller? Recapture + only 15% taxation still means a very good profits by higher prices.
She can complain all the way to the bank, poor thing?
76% of a much higher selling price is GOOD!
You can also do a 1031 if you want to stay in the rental biz and keep the 15% for now.

    Bookmark   July 20, 2007 at 2:44PM
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zone_8grandma

She can complain all the way to the bank, poor thing?
76% of a much higher selling price is GOOD!

Umm, I wasn't complaining. I was attemting to factually ascertain the net proceeds. This is part of our retirement plan. We're not interested in staying in the rental business, so when we sell it, that's it.

    Bookmark   July 20, 2007 at 5:14PM
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saphire

What about doing a 1031 someplace you want to retire? Renting if for a short time and then living in it (no idea how long you have to rent it for 1031)

Of course if you wanted to stay in the rental business the easiest anwer is do a cash out refinancing. Finance as much as the rent will allow and take the money and keep the property

    Bookmark   July 21, 2007 at 1:31PM
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cmarlin20

he can complain all the way to the bank, poor thing?
76% of a much higher selling price is GOOD!
Umm, I wasn't complaining. I was attemting to factually ascertain the net proceeds. This is part of our retirement plan. We're not interested in staying in the rental business, so when we sell it, that's it.
Oh, I wasn't addressing your comments, I was addressing gina's post complaining about "inflation and "crazy idiots" overpaying for houses are pushing the sales price up."
I'm happy for you to make a good profit for your retirement.

    Bookmark   July 23, 2007 at 3:19PM
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kitbun

To respond to the original question, I seem to remember when we sold a rental property a couple of years ago that in addition to paying the capital gains taxes, that YES, we WERE pushed into a higher tax bracket.

    Bookmark   July 26, 2007 at 7:32PM
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chisue

If you don't need the cash, do consider the 1031. You can take SOME of the profit (called the boot) if you like. Invest whatever you are comfortable with in another rental property, perhaps where you DO want to retire.

We sold a rental in Illinois and bought a condo on Maui. It's in a vacation rental pool and has been a breeze to manage. It's appreciated well and turns a slight profit every year.

I'm all for deferring any payment of taxes.

    Bookmark   July 27, 2007 at 2:21PM
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luckymom23

Hi z8grandma!
We just sold a rental and I tried very hard to find a way to minimize our tax liability...unfortunately our situation was pretty cut & dried. We will be paying our regular income tax as usual and @15% Federal capital gains (plus state taxes on the gain as well - there is a benefit to living in Washington for you!)
However, there could be a benefit to selling sooner over later...there was a capital gains tax relief bill passed a few years back and it is 'good through' 2008. Whether or not it helps in your particular situation will depend on your tax bracket. There are also ways to avoid the capital gains tax and keep the money in real estate without being a landlord. You might check out REIT's-Real Estate Investment Trusts and see if any qualify and TIC's-tenants in common, where you own a 'piece' of real estate. These can provide income which will be taxed at your regular rate and can preserve the 'principal' for your heirs if you desire and then the basis will be set at the market value when they inherit.
If you were to decide to do a 1031 and live in the property to turn it back into a personal residence then you have to rent it for 1 year first and then live in it for 2. I'm not sure how that works when it is a vacation property.
Disclaimer: this is how I understand it from my research, you should definately get professional advice and information if you are interested in any of these ideas!

    Bookmark   August 18, 2007 at 5:45PM
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