Selling Rental Property

[Livefree]

I'm selling a Rental Property I own, and have a few questions. I've never sold a property before.


Should I hire a Real Estate Attorney to review the P and S agreement, as well as represent me at the closing? My Realtor says they charge $850-$1000, which I don't have a problem with, just checking that I should do this.


What other things should I be aware of?


Thanks.

 

[97guns]

The Cost of Depreciation When You Sell

When you sell your property, you must pay 25 percent recapture tax as well as regular state income tax on the depreciation you claimed. If you are in a higher tax bracket than the 25 percent bracket, the recapture tax is less than the income tax than you would have paid. Even if the recapture tax is the same as your income tax bracket, you still had the benefit of getting to use the money you saved for the years that you deducted it. In essence, it works out as getting an interest-free loan of the money from the government.
Avoiding Depreciation Recapture
Here's the beautiful thing -- you don't actually have to pay recapture tax. As long as you plan to reinvest the proceeds of the sale into more investment real estate, you can structure the transaction as a 1031 exchange.

 

[Huston55]

Rental Property Disposal Options

Here are some options for you to consider. Suggest you do a NPV analysis for your situation, using the options you find attractive.

http://www.early-retirement.org/for...ptimum-income-from-rental-property-83474.html

 

[HawkeyeNFO]

Here's the beautiful thing -- you don't actually have to pay recapture tax. As long as you plan to reinvest the proceeds of the sale into more investment real estate, you can structure the transaction as a 1031 exchange.

This oversimplifies it. A 1031 exchange has very specific requirements and rules to follow. Just having a "plan to reinvest the proceeds" is not enough to avoid the recapture tax.

 

[Livefree]

I'm aware of the depreciation/capital gains I will pay. From a financial position, it makes more sense to keep it, but I'm tired of it, and have another rental that I will keep.


The house is paid for, and my accountant said if it sells for $600k I will net $470 as I"ve depreciated it for 15 years now. I will also have to pay back $12k in subsides (ACA Insurance)



The property never got to MLS and had a private showing last night that resulted in an offer of $680k which I'm excited about.

 

[RobbieB]

Woo-Hoo, an extra 80 grand -

 

[Cobra9777]

We sold a rental property last year. We had no attorney. Just a well-compensated realtor and title company. The transaction went very smooth. The tax part was a little complicated with TurboTax, but I managed it myself. We had a large gain on the sale but the hit from depreciation recapture was relatively minor in our case because we only owned the house for 4 years and all of the gain and recapture fell into the 15% bracket. It's not a flat 25%. It's a maximum special CG rate of 25%, which is taxed at ordinary income rates for taxpayers in lower brackets. I had to skip Roth conversions but managed to squeeze it into the 15% bracket. The size of the gain did push some of our QDs and LTCGs from 0% into 15% territory, but the overall hit was much more palatable than I was originally expecting.

 

[michelek]

We had a large gain on the sale but the hit from depreciation recapture was relatively minor in our case because we only owned the house for 4 years and all of the gain and recapture fell into the 15% bracket. It's not a flat 25%. It's a maximum special CG rate of 25%, which is taxed at ordinary income rates for taxpayers in lower brackets.

We have a similar situation this year. We are selling a home that has significant depreciation while we expect to be a tax bracket lower than 25%.
I did not know that depreciation recapture rates could vary! Thank you for mentioning this.
Any further info on how to calculate would be much appreciated .

 

[Scrapr]

When we sold a rental a few years ago we had a fair amount of depreciation because we had 1031 into the duplex. The sale & recapture pushed us into AMT. So take a look there too

If I had it to do over I don't think I would have 1031 that deal. But that is hindsight. Also just missed being defrauded by the 1031 exchange company. They were doing some shady stuff I came to find out after. My realtor lost a good chunk of money with them when they went BK about a year later

 

[Cobra9777]

We have a similar situation this year. We are selling a home that has significant depreciation while we expect to be a tax bracket lower than 25%.
I did not know that depreciation recapture rates could vary! Thank you for mentioning this.
Any further info on how to calculate would be much appreciated .

All I can suggest is that you become intimately familiar with the Schedule D tax worksheet. That's where the math takes place. The logic is a little difficult to decipher from the worksheet. So I recreated what was happening in an Excel spreadsheet just to verify my understanding. I initially worked through this middle of last year using a 2016 version of TurboTax Premier. With all the changes in 2018, I'm not sure how helpful the 2017 version will be, but that's still where I would start. Just do a pro-forma version of your 2018 return with the expected numbers from the sale, then start studying the Schedule D tax worksheet.

 

[Souschef]

I sold my rental a few years ago, using a Realtor.I used Turbotax to do all the work, including depreciation recapture.
Since I had a management company handling everything, it was easy to do my taxes.