Selling rental, what taxes to expect

[pb4uski]

.... And my goal now is to be sure to spend as much as possible to avoid estate taxes. I can look at that as whatever I want to buy I’m getting for 40% off. Can’t wait to get my Altoz tracked zero turn mower. It will compliment our new John Deere tractor well. Of course I’d rather leave the money to my family but that’s not possible without losing 40% to taxes.

Tax policy does drive behavior. I would be married but it would hit my other half too hard tax-wise being married to me. He’d like to sell his rental property but that would cost him over 10k in health insurance subsidies.

The idea of the government taking 40% of what you’ve worked your lifetime to earn is bothersome for sure. Especially the way they’ve devalued the dollar.

So the 40% is after the $11.7 million exemption amount and the first $1 million that is taxed at various rates lower than 40%... so the first $11.7 million is 0% estate tax, then next $1 million is 34.58% and anything above $12.7 million is at 40%... so first, consider yourself very lucky and second, get going on estate tax planning.

So they don't really take 40% as you said because the first $11.7 million is 0%... even for a $20 million estate it would net out to 16.33%.

 

[ivinsfan]

So the 40% is after the $11.7 million exemption amount and the first $1 million that is taxed at various rates lower than 40%... so the first $11.7 million is 0% estate tax, then next $1 million is 34.58% and anything above $12.7 million is at 40%... so first, consider yourself very lucky and second, get going on estate tax planning.

So they don't really take 40% as you said because the first $11.7 million is 0%... even for a $20 million estate it would net out to 16.33%.

This is Fed I take it, don't forget the state needs their share of the bounty too.


I had a rude awakening when my cousin in PA died with a smallish think 700K estate and the PA taxes were not minor. In fact since the aunts and cousins aren't considered 1st degree relatives we paid extra!

 

[Joylush]

So the 40% is after the $11.7 million exemption amount and the first $1 million that is taxed at various rates lower than 40%... so the first $11.7 million is 0% estate tax, then next $1 million is 34.58% and anything above $12.7 million is at 40%... so first, consider yourself very lucky and second, get going on estate tax planning.

So they don't really take 40% as you said because the first $11.7 million is 0%... even for a $20 million estate it would net out to 16.33%.

And why should anything you’ve already paid taxes on be taxed all over again? It’s nothing more than a government money grab. Another penalty for not blowing everything you ever earned. Today’s savers are penalized by government policy keeping rates artificially low, and those who have managed to save or hold on to appreciated assets for awhile are penalized for saving too much.

And they don’t think this influences behavior? It does. Guess I need to look into marrying a younger person before I die to take advantage of the unlimited spousal exemption. I will give away whatever will be subject to the 40% tax before I give it to the government. It will be my last act of control over my own assets. Just annoying there is so much planning involved. The more you have the harder you have to work to keep it and the more you have to pay to protect yourself from liability.

And frankly that whole “you’re so lucky” thought process is insulting. Just another way to justify why I don’t deserve to keep my own money.

 

[Koolau]

Haven't followed this thread closely. I don't know much about selling rental property except that depreciation recapture really hurts.

Mostly I picked up on the issues with paying lots of taxes. I'm hearing of late that we will be paying for our more recent extravagances (and proposed extravagances) by "asking" the "rich" to pay their "fair share." Guess what, boys and girls. We have met the rich and he is us. YMMV

 

[workmyfingerstothebone]

Thank you everyone for your input and comments.


I definitely learned some stuff that I will bring to the tax preparer.


For the one post asking why I didn't sell the property 11 years ago you may remember that was during the housing crash. We used that as an opportunity to move into a nicer home for 1/2 the cost. Selling the original home for "crashed" prices would be a terrible financial move therefore we became landlords.



We decided to wait till the markets recovered, and they have.


I believe this happened to a percentage of home buyers during the crash , that is, becoming a landlord by chance not choice.


Anyway, I am happy with my decision of being a landlord for those 11 years and it has paid off, luckily. I know now I should have done more investigation into taxes.



If I remember, next April, I'll post how the taxes worked out.

 

[Joylush]

Thank you everyone for your input and comments.


I definitely learned some stuff that I will bring to the tax preparer.


For the one post asking why I didn't sell the property 11 years ago you may remember that was during the housing crash. We used that as an opportunity to move into a nicer home for 1/2 the cost. Selling the original home for "crashed" prices would be a terrible financial move therefore we became landlords.



We decided to wait till the markets recovered, and they have.


I believe this happened to a percentage of home buyers during the crash , that is, becoming a landlord by chance not choice.


Anyway, I am happy with my decision of being a landlord for those 11 years and it has paid off, luckily. I know now I should have done more investigation into taxes.



If I remember, next April, I'll post how the taxes worked out.

You will be happy when you’re relieved of the worry and burden and it’s a great opportunity to sell. I was kinda sad when I sold my first one purchased in 1986 and kept for 32 years but I never looked back and feeling was fleeting. Yeah, being fully depreciated the taxes were a bear! Such is life. You never make as much on them as you think you would even when they double or triple in value. Not when the upkeep costs, taxes etc…keep going up so significantly as they always do.

 

[pb4uski]

And why should anything you’ve already paid taxes on be taxed all over again? It’s nothing more than a government money grab. Another penalty for not blowing everything you ever earned. Today’s savers are penalized by government policy keeping rates artificially low, and those who have managed to save or hold on to appreciated assets for awhile are penalized for saving too much.

And they don’t think this influences behavior? It does. Guess I need to look into marrying a younger person before I die to take advantage of the unlimited spousal exemption. I will give away whatever will be subject to the 40% tax before I give it to the government. It will be my last act of control over my own assets. Just annoying there is so much planning involved. The more you have the harder you have to work to keep it and the more you have to pay to protect yourself from liability.

And frankly that whole “you’re so lucky” thought process is insulting. Just another way to justify why I don’t deserve to keep my own money.

Most estates, I'm guessing yours included, have significant embedded unrealized appreciation that has never been taxed and will never be taxed because of stepped up basis... so you haven't already been taxed on all of it. The estate tax is the quid pro quo to get the benefit of stepped up basis and you and your heirs avoid paying tax on all that unrealized appreciation.

I guess that alternatively, we could include in the income of a decedent's last income tax return all unrealized appreciation as of the date of death as if the decedent's assets had be sold for fair value, forgo an estate tax and keep stepped up basis.

Another way to think about it is that if you have an asset that you paid $1m for and is now worth $3m that the $3m isn't really all your money... a portion of that $3m is the government's money... it's just that they haven't collected it yet but they will have an eventual claim on it... either when you sell it in the future

 

[Joylush]

Most estates, I'm guessing yours included, have significant embedded unrealized appreciation that has never been taxed and will never be taxed because of stepped up basis... so you haven't already been taxed on all of it. The estate tax is the quid pro quo to get the benefit of stepped up basis and you and your heirs avoid paying tax on all that unrealized appreciation.

I guess that alternatively, we could include in the income of a decedent's last income tax return all unrealized appreciation as of the date of death as if the decedent's assets had be sold for fair value, forgo an estate tax and keep stepped up basis.

Another way to think about it is that if you have an asset that you paid $1m for and is now worth $3m that the $3m isn't really all your money... a portion of that $3m is the government's money... it's just that they haven't collected it yet but they will have an eventual claim on it... either when you sell it in the future

You have some good points. But you should never be taxed on your original investment/savings. Only on the appreciated unrealized taxable value.

But the way it works they tax all your original principal as well as the value of the gains.

Thus any amount over the exclusion is fully taxed at 40%. It could be a million dollars tucked under your bed that you saved and never earned a dime on, but somehow you owe the government $400,000 of it just because you choose to save it? What the heck is that other than theft?

 

[RobbieB]

I dunno. But the 11 million in the bank is tax free. So your estate owes 400 grand on an 11 million transfer?

Oh the pain.

 

[Joylush]

I dunno. But the 11 million in the bank is tax free. So your estate owes 400 grand on an 11 million transfer?

Oh the pain.

You shouldn’t owe any taxes on any money you have already paid taxes on. I don’t consider it some sort of gift for them not to tax some of it. Your estate should only ever owe any taxes on only un-previously taxed gains. Why is what’s yours treated any differently just because you’re dead? Don’t be envious because someone else choose to save more than you did. You made full use of your money by spending it. So they should be penalized because they chose not to? How is that remotely justifiable in your code of ethics?

We need savers and investors, not just a bunch of spenders. If nobody was encouraged to invest and save their capital what do you think would happen to the economy then? The government should encourage investment and savings but tends to do the opposite.
Research the relationship between savings and economic growth. Savers should be rewarded, not penalized.

 

[RobbieB]

You don't, you're dead.

 

[captain3d]

Well no one likes paying taxes. I especially dislike tax on used cars that have already had the tax paid maybe multiple times.

 

[Bruceski44]

If you're going to be taxed like a rich person, you should begin working the tax code like a rich person.

The 1031 tax-deferred exchange is still on the books and if you take advantage of it before Congress changes it, you'll be saving taxes on all your cap gains and depreciation recapture. Rich people don't pay extra taxes if they don't want to and can legally avoid it.

There has been much discussion on this forum about DST real estate investments, you should search out old posts, or look at some of my old posts. There are many thousands of investors taking this route, with tens of millions of dollars every month being invested. These investments are an excellent way for you to stay invested in real estate for it's diversification and income benefits, while still getting tax deductions from RE, avoiding taxes on your sale and getting out of active RE management.

Some people don't like them because they lost money or paid high fees. I've been invested in 4 of them since 2014 and they pay me every month, even through COVID. The distributions did not waver one cent during lockdown. I earn 5-7% annually, after all fees and am happy to pay someone else to manage the properties and send me money every month. These investments preserve my capital, may show some appreciation and pay me regular income. I plan to continue using 1031 exchanges, as long as Congress doesn't mess up my strategy in their never-ending quest for more of my money, and the properties will go to my heirs with a stepped-up basis.

 

[Joylush]

If you're going to be taxed like a rich person, you should begin working the tax code like a rich person.

The 1031 tax-deferred exchange is still on the books and if you take advantage of it before Congress changes it, you'll be saving taxes on all your cap gains and depreciation recapture. Rich people don't pay extra taxes if they don't want to and can legally avoid it.

There has been much discussion on this forum about DST real estate investments, you should search out old posts, or look at some of my old posts. There are many thousands of investors taking this route, with tens of millions of dollars every month being invested. These investments are an excellent way for you to stay invested in real estate for it's diversification and income benefits, while still getting tax deductions from RE, avoiding taxes on your sale and getting out of active RE management.

Some people don't like them because they lost money or paid high fees. I've been invested in 4 of them since 2014 and they pay me every month, even through COVID. The distributions did not waver one cent during lockdown. I earn 5-7% annually, after all fees and am happy to pay someone else to manage the properties and send me money every month. These investments preserve my capital, may show some appreciation and pay me regular income. I plan to continue using 1031 exchanges, as long as Congress doesn't mess up my strategy in their never-ending quest for more of my money, and the properties will go to my heirs with a stepped-up basis.

That is an option but a 1031 exchange does avoid taxes. It just defers them.

 

[Bruceski44]

That is an option but a 1031 exchange does avoid taxes. It just defers them.

Which is why the first few words in my 2nd paragraph say "...1031 tax-deferred exchange..." I don't get your point.

 

[ncbill]

That is an option but a 1031 exchange does avoid taxes. It just defers them.

Until you: retire outside of a high-tax state like California, or die so your heirs can sell based on the stepped-up valuation.

 

[Joylush]

Until you: retire outside of a high-tax state like California, or die so your heirs can sell based on the stepped-up valuation.

Until that’s taken away or you exceed the estate tax exemption amount which is planned to be reduced significantly in the near future when the current exemption amount sunsets and is cut in half again.

 

[Bruceski44]

Until that’s taken away or you exceed the estate tax exemption amount which is planned to be reduced significantly in the near future when the current exemption amount sunsets and is cut in half again.

It seems foolish to plan for what may happen. The future is uncertain, including whether any of us will live to see the changes you forecast. But let's say the changes you cite do happen. What is the difference between the OP's current situation and the future situation you refer to? The OP is faced with the same tax situation then as (s)he is now. Kicking the can down the road is a viable strategy. And based on the current reality, deferring taxes is the best strategy IMO.

 

[ncbill]

Until that’s taken away or you exceed the estate tax exemption amount which is planned to be reduced significantly in the near future when the current exemption amount sunsets and is cut in half again.

From the OP: "selling price: $400k"

So no, I don't think so.

 

[pb4uski]

Until you: retire outside of a high-tax state like California, or die so your heirs can sell based on the stepped-up valuation.

Since the property is in Calfornia, California is going to get their tax on the gain on sale whether or not you are still a California resident at the time of sale.

 

[jkern]

Being a landlord in CA I feel your pain. CA is especially anti landlord and pro tenant. They recently passed legislation (AB 1462) trying to implement state wide rent control. Fortunately, I was exempt this time. These laws make it exceedingly more difficult and more expensive to get back control of your property (in case you want to sell or move in).

The eviction ban just exasperates the problem. The risks of being a landlord in CA are going up exponentially. Just like all investments, if the risk goes up the return must go
up or you sell out. If I fall under rent control in the future I will liquidate and get out of the business. That means three fewer rental units in the rental market. Legislation like this will eventually reduce the supply and drive the costs even higher.

Also, in many cases the depreciation recapture is a bad deal the tax payer. For many people the recapture tax is higher than the tax savings realized from depreciation over the years. I believe that's why the government forces you to depreciate. Given the choice I would skip it.

Unfortunately, what use to be a 15% Capital Gains tax has become 23.8% tax for large gains like the sale of Real Property.

There's my rant for the day.

 

[ncbill]

Since the property is in Calfornia, California is going to get their tax on the gain on sale whether or not you are still a California resident at the time of sale.

So I'd do a 1031 exchange (or series of exchanges) instead, probably at a lower return, of course, holding until my estate gets the step-up rather than lose ~$100k on a $400k sale.

 

[cathy63]

Since the property is in Calfornia, California is going to get their tax on the gain on sale whether or not you are still a California resident at the time of sale.

Yup. And you can't exchange your way out of the tax due either. If you do a 1031 to swap property that's in CA for something out-of-stae, you have to file form CA-3840 every year until you either dispose of the final property in the chain and pay the deferred tax or you die.

 

[pb4uski]

Since tax fairness was one tangent in this thread, I figured that I would post this link which showed up in my inbox from Kiplinger.

Are You Paying Your Fair Share of Taxes?
How does your tax bill compare to others?​

Our handy tool will tell you where you rank as a taxpayer.

We're hearing a lot lately about creating a more fair and equitable tax system. President Biden and Congressional Democrats have plans to tax the rich more heavily and make them pay their "fair share" of taxes. The long list of proposals to increase taxes on wealthier Americans include raising the top income tax rate from 37% to 39.6%, eliminating the lower capital gains tax rates for people earning $1 million or more, auditing more rich people, and eliminating various tax breaks for people making at least $400,000 per year.

But what about you? Are you paying your "fair share" of the nation's tax burden? Do you even have the faintest idea what portion you pay...beyond a gnawing feeling that it's too darn much? Are you in the top 1%, 5%, 10%, 25% or 50%...or the bottom 50% of income earners?

To help you answer these questions, we created a tool to show how the nation's taxable income and the country's federal income tax bill are distributed among its citizens. Our tool uses the latest IRS data to shine a bright light into what are too often murky shadows.

We also show you how your own income stacks up against that of your fellow Americans.

Are you ready to see where you fit in? With the calculator below, simply enter a single number from your latest tax return, and you'll instantly know the answer.

https://www.kiplinger.com/kiplinger...=20210728-tax&utm_medium=email&utm_source=tax

And if I input $107,650, the amount of income that would put a MFJ couple that are both over 65 at the top of the 12% tax bracket in 2020, then I get the following result. While the result is interesting it doesn't necessarily answer the "fair" question which is one of those "eye of the beholder" type things.

 

[Joylush]

Since tax fairness was one tangent in this thread, I figured that I would post this link which showed up in my inbox from Kiplinger.



https://www.kiplinger.com/kiplinger...=20210728-tax&utm_medium=email&utm_source=tax

And if I input $107,650, the amount of income that would put a MFJ couple that are both over 65 at the top of the 12% tax bracket in 2020, then I get the following result. While the result is interesting it doesn't necessarily answer the "fair" question which is one of those "eye of the beholder" type things.

It is interesting to show where you fit but it doesn’t really cover the fairness issue. All it told me is I pay much more than most people. I already knew that. Is it fair? Depends on if you are me or you I guess.

In my view the only way to make it truly fair and equal we’re if everyone paid the exact same amount. Income shouldn’t matter. One person doesn’t pay more for a loaf of bread simply because they earn more.

Since we know that’s never going to happen we need to be sure the percentage paid by the various income groups doesn’t become punitive or over-the-top. Even if the rate was the same for every group those making more would always be paying more.

Every income group should pay something. Even if it’s a paltry amount. If you are not participating in any way it’s hard to take you seriously.