Capital Gains Tax Question; HELP!! - Posted by Kim

Posted by JPiper on September 09, 2001 at 23:58:33:

Bud:

More specifically what I was questioning was why the PacTrust led to these particular advantages rather some other type of deal.

Frankly a deal that gives a paper loss to me is not a deal. I wouldn?t do it to start with. But at the same time if I were going to do it I don?t see that a PacTrust makes it inherently safer in terms of non-payment, repair, or vacancy. I don?t see that there is anything inherent in the PacTrust that causes a buyer to sit down and write out a check for his payment, or to decide to repair the place. You could have as easily said lease/option or contract for deed instead of PacTrust.

I understand that you feel it is safer to hold this way because of legal issues. But again, I highly doubt that PacTrust buyer pays any better than a buyer under any other creative deal.

JPiper

Capital Gains Tax Question; HELP!! - Posted by Kim

Posted by Kim on September 07, 2001 at 21:02:42:

I’ve snooped around the IRS website, but could not get a useful answer to my question. Seeing all of the experienced investors here, I’m hoping for some help…

How can I find out how much in taxes I will have to pay this tax year on houses I flipped during the tax year? Some say 35% is a good amount to “tuck away” from each flip, others say only 25%. Any suggestions?

Also, is there any way I can pay less in capital gains every year? I’ve read a few articles about the IRA’s for investors supported by the government, but they are greek to me (I’m a blonde female, so what can you expect?)

Any advice/assistance would greatly be appreciated! THANKS!

Re: Capital Gains Tax Question; HELP!! - Posted by Dave T

Posted by Dave T on September 07, 2001 at 21:49:55:

There’s good news and bad news.

The good news is that you don’t have to pay any capital gains taxes.

The bad news is that the profits on your flip activities are taxable as ordinary income at your marginal tax bracket. Assuming that you did these transactions in your own name, you would report your flip activities on Schedule C. Your Schedule C income may also be subject to self-employment taxes.

Re: Capital Gains Tax Question; HELP!! - Posted by John

Posted by John on September 10, 2001 at 11:27:23:

Dave,

I don’t understand why the gains are considered ordinary and belong on schedule D. Is Kim classified as a dealer or real estate professional? Tough designation to get. I’m sure she can make a plenty strong argument for the gains to be treated as capital, especially if she is a W-2 employee. In that case, wouldn’t she be sitting on 20% LTCG?

Also, Kim, don’t forget to make estimated tax payments before the year end, lest you get hit with a underpayment penaly.

Good luck-

John.

Re: Capital Gains Tax Question; HELP!! - Posted by JB

Posted by JB on September 08, 2001 at 07:59:54:

What is the income limit for rental write-off’s, or is there? I had a pretty good year with my primary employer and I also got into the REI buisiness this year as well. Thanks

Re: Capital Gains Tax Question; HELP!! - Posted by Dave T

Posted by Dave T on September 10, 2001 at 18:17:13:

In Kim’s post she said that she was flipping properties last year. The IRS treats flip properties as dealer realty, taxed as ordinary income. By definition, flip property is property held for the purpose of quick resale to customers (hopefully at a profit).

Dealer realty activities are reported on Schedule C. The IRS does not classify anyone as a dealer, instead each property transaction is evaluated to determine if dealer realty tax treatment should be used. Kim’s W-2 status is irrelevant.

For long term capital gains tax treatment to apply, Kim would have had to hold the property longer than 12 months, and have used the property in a business or for the production of income (as in rental use). Since both of these tests failed in Kim’s case, her profits are not eligible for capital gains tax treatment.

Re: Capital Gains Tax Question; HELP!! - Posted by Dave T

Posted by Dave T on September 08, 2001 at 11:04:06:

If your ordinary income is $100K or less, $25K of passive activity losses can be used to offset ordinary income before taxes. If your ordinary income is greater than $150K, then your passive losses must be carried forward and may not be used to offset ordinary income.

If your ordinary income is greater than $100K but less than $150K, the $25K passive loss allowance is reduced by $1K for each $2K of ordinary income over $100K.

Re: Capital Gains Tax Question; HELP!! - Posted by Bud Branstetter

Posted by Bud Branstetter on September 08, 2001 at 10:19:27:

Are you talking about the 25K passive loss that is phased out as the income increases? Why would you invest in something that had a loss?

Re: Capital Gains Tax Question; HELP!! - Posted by mohito

Posted by mohito on July 16, 2002 at 22:12:15:

Is there a rule that indicates what kind of income you can offset the passive loss carryover? Do I have to offset future years passive income or can I offset fiture years ordinary income assuming my income falls below 150,000?
I also read somewhere that you can put the loss toward the basis of the property when you sell??? Can someone shed more light into this?

Re: Capital Gains Tax Question; HELP!! - Posted by mohito

Posted by mohito on July 16, 2002 at 22:07:29:

Follow up question -
If you have a passive loss carryover (weren’t able to offset ordinary income because income for the year was above 150,000)in future years can you use this ONLY against other passive rental income, or can you use it against ordinary income (assuming your income fell below 150,000)
Thanks

It doesn’t have to be a real loss… - Posted by David Krulac

Posted by David Krulac on September 08, 2001 at 13:15:12:

you could have a positive cash flow but depreciation greater than cash flow to have a loss for IRS purposes. And as the other David posted correctly if your ordinary income is greater than $150k them you have to carry forward these depreciation losses until such time (year ) as you can take them or carry forward until the property is sold and offset selling gain.

Prior to 1987 there was not $25,000 cap on rental losses and some people had paper losses in the six figures and income in the six figure and didn’t owe any tax. The depreciation schedules were also shorter as short as 15 years and it was easier to accummulate lots of depreciation losses. Ah the good old days.

Paper loss - Posted by Bud Branstetter

Posted by Bud Branstetter on September 08, 2001 at 19:07:03:

David,

My point was that you have to be very careful about paper losses. I have a number of highly leveraged subject to properties that on paper(depreciation taken) do provide write off for current tax years. The only way I am able to touch those type of investments is through Pactrusts so that the occupant is stable. It would not be reccommended to highly leverage a normal rental property. The risk of vacancy, repairs or non payment is too high. I can also control my taxable income by placing deals into the IRA.

The paper loss sould not be the reason to do an investment.

Nor do I suggest Paper losses as… - Posted by David krulac

Posted by David krulac on September 09, 2001 at 17:30:36:

an investment goal. Depreciation is not option per IRS code as when you figure capital gains you must subtract out depreciation taken OR allowed. If the depreciation was allowed and you did not take it the capital gains would be figured out the same. Your loss!
It makes no sense to me to buy a property for the tax loss, I was just explaining how you could have positive cash flow AND a loss for the IRS at the same time, they are not mutually exclusive events.

Re: Paper loss - Posted by JPiper

Posted by JPiper on September 08, 2001 at 19:37:13:

What is there about the PacTrust that reduces vacancy, repairs, or non-payment?

JPiper

Re: Paper loss - Posted by Bud Branstetter

Posted by Bud Branstetter on September 09, 2001 at 23:40:43:

Jim,

I was sure you knew the answer but for the benefit of others these are my reasons.

Non-payment, A contingency fund is set up with the occupants money to pay the monthly payment. Couple this with the buy-in(down payment) to the trust and they have something to lose. More similar to a purchase or CFD.

Repairs, The occupant is on a triple net lease and responsible for repairs. In order to take the deductions on their personal return they must incur the burdens of ownership.

Vacancy, The people want to own now. They will finance later. The term of the trust is set up at the beginning similar to an option. Because they are in for more than a year at a time the vacancy is lower.