Re: capital gains taxes - Posted by David Butler
Posted by David Butler on December 22, 2000 at 14:23:45:
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