Posted by JayHoward on December 28, 2000 at 10:55:09:
The bad news is if the one year you lived in the house was the earliest of the five years - that is if you lived in it say in 96 and then rented it our for the next four years - you’ll have to live there for TWO years to qualify because it’s two years in the most recent five years. That was the case with out house. We didn’t want to move back in for two years so we just sold it and paid the piper.
JHoward
capital gains taxes - Posted by Darcy
Posted by Darcy on December 21, 2000 at 20:31:56:
I would like some general information, I have owned a rental property for about 3 years. I purchased the property for about $92,000 and the Mortgage balance is about $90,000 and Iam considering putting it on the market this spring. I have done some research and will probably list and sell the property at around $140,000, I also had to reside the property (improvement?) that cost me about $9000. How does all this affect me tax wise? Is there anything I should do to avoid too much capital gains? Is there an easy standard percentage that can be applied when I look at a purchase price of a property to selling that property down the road?
I also have a 2nd rental property that I’ll be in a similar situation and will sell within a year?
Any suggestions and tips?
Thank you
Re: capital gains taxes - Posted by David Butler
Posted by David Butler on December 22, 2000 at 14:23:45:
Hello Darcy,
Hey, congratulations on what looks like a nice profit!
Here’s some rough approximation you can figure for determining your tax liability:
$92,000 purchase price, plus
1,000 capitalized closing costs (check your real #'s)
9,000 capital improvements (assuming all nondeductible in year spent) LESS,
( 8,196)estimated depreciation (based on $102,000 cost
basis, x .75 improvement to land value ratio,
divided by 28 years, quotient multiplied by
3 years =
$93,803 adjusted tax basis in property
$140,000 sales price, less
( 12,400) estimated closing costs (used 9% factor)=
$127,600 net proceeds, LESS
( 93,803) adjusted tax basis =
$33,797 capital gains (taxed at 20% capital gains rate, or 18% cap gain rate if you are in lower qualifying bracket)=
$ 6,759 capital gains tax due
Yes, there are several different strategies you may use to mitigate the tax “friction” in your deal, depending on your circumstances and your objectives overall. Two basic strategies that might be helpful for you can be found in a recent issue of the ANN Update On Real Estate newsletter at:
As to determining values… there is a rule of thumb percentage rate you can use on pure income properties,
known as the “cap rate”. In such a case, you look at the sales prices on comparable income properties within a given demographic location, and multiply those sales prices against by the annual NOI (net operating income). Conversely, you can take your NOI, and divide
that by the cap rate, and ascertain a rule of thumb resale value.
For example, you locate three similar properties that have sold in the past six monts to one year, and compare the sales prices to their NOI’s. Say the average on the three comes to 9% cap rate. Now, you could look at your property, see that the NOI is say, $12,600 (after expenses and before debt service), and divide that number by the 9% cap rate you determined to be applicable in your location. $12,600/9% = $140,000.
The more thorough you are in your research of the comparable properties, the more reliable your cap rate will be, and less rule of thumb. (appraisers use cap rate as an integral factor in valuing true income properties).
By the way, generally speaking, cap rates are not used in evaluating SFR units, even if rented out. Standard FMV approach is used in that instance.
Hope this helps, and Merry Christmas!
David P. Butler
Similar Situation - Posted by Sean
Posted by Sean on December 24, 2000 at 14:59:17:
I bought a small rental property for $31,880 in January 98 and lived there until Feb 1999 when I moved a renter in on a two-year lease-option (purchase price $45,000). A property in the complex recently sold for $57,000 (787 sq. ft. vs. mine is 772). I expect the option to expire unexercised.
If I don’t renew the lease and just move the tenant out and sell would the whole amount be subject to capital gains or would only half because I lived there over a year in the past 5 years?
Re: Similar Situation - Posted by Ron Ohara
Posted by Ron Ohara on December 27, 2000 at 16:40:10:
I always have a saying. When asking for Legal Advice, see an attorney. When asking for Tax Advice, see a Tax Attorney or a Tax Specialist.
Each situation is different to each individual. The penalty is too high and costly not to do this.
Ron Ohara
Capital 500 Funding
Re: Similar Situation - Posted by SueC
Posted by SueC on December 27, 2000 at 15:23:49:
I believe you have to have lived there for two of the past five years to avoid being taxed on the gain as a homeowner-seller.
Re: Similar Situation - Posted by JayHoward
Posted by JayHoward on December 28, 2000 at 24:35:27:
This is correct. We sold a rental property that had previously been our personal residence. We had lived there one in the past five years. I hounded my tax preparer to find a way to prorate the capital gains, but there is no such option. If possible, you could always move back into the house and convert it back to your primary residence. That was not something we wanted to do, so we bit the bullet and paid the taxes.
Re: Similar Situation - Posted by Sean
Posted by Sean on December 28, 2000 at 08:52:56:
Thanks, that’s exactly what I wanted to know. I guess I’ll move back in for awhile.