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Old 08-13-2021, 06:49 AM   #21
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OP is selling due to government overreach. My comment was to the reply suggesting they didnít see any overreach.

So while the OP is appalled by the enormous tax hit upon selling, it was also about why they were selling.

I too am appalled by the illegal overreach, more so than the enormous tax hit involved in selling.

One option to lessen the tax hit is to sell with owner financing to a well qualified buyer. This will spread the taxes out over many years and perhaps not bump you into a higher bracket where you are penalized by additional taxes like the Obamacare tax, or increased Medicare premiums. Iíve done this several times and so so far so good.
On the last part, I agree... I recall that my Dad did an installment sale on a piece of land to spread out the tax bite and the same could be done for a rental.
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Old 08-13-2021, 07:07 AM   #22
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Originally Posted by ivinsfan View Post
Is the rental already sold, I can't tell from what have posted.


That a lot of tax, I'll grant you that. I'll also say that if it's in Cali that's a big part of the reason you are selling for almost 325 more then you paid for the place.

It's kind of like the IRA or 401 you can pay me now or you can pay me later....how much do you think all those years of tax deductions saved you in taxes.
We've had the house 32 years, so the appreciation isn't that compelling. Averages to about $9300/yr appreciation. In the first few years (2-4) that's almost 9.5% but in the majority of the years it's more like 3.1% to 3.73%.


That's all before adding in any costs for maintenance, taxes, insurance. So the total yield is a little lower.


Only rented 11 years and in no way did the depreciation make up for the gouging we'll take from the State and Government. I think it depreciated about 3500/year. If I guess we paid 20%fed taxes then that comes to 700/year. Do that for 11 years and I saved 7700.00 in fed taxes, even less in state (my guess is $2000 in state taxes).



So for the privilege of saving less than 10K in taxes over 11 years, the state and government are going to charge me 70K to 90K WTF!


Others have mentioned it and the problem is the sale is a one time event so all the taxes come due in that one year.
It would be nice to spread that out.... managing my taxes for the future.
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Old 08-13-2021, 07:19 AM   #23
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You are confusing depreciable basis and cost basis. Your depreciable basis includes only the parts of the asset that have a limited lifespan, e.g. the building and the improvements you've made to it. Over the years the depreciation has reduced the tax owed on your rental property, and now that you have sold it, you will have to recapture that depreciation.

The depreciation recapture amount will be taxed as ordinary income with a max rate of 25%. Based on the numbers you gave, I think the entire amount would fall in the 22% bracket, so the cap doesn't come into play and you'll pay about 22% of $33K, which is $7260.

In addition, you need to know the adjusted cost basis of your property. That is:
+ cost of building -- $78K
+ cost of land -- ??
+ allowed closing costs from the original purchase -- ??
+ cost of all improvements -- $40K
- depreciation you took (or should have taken) while it was a rental -- $33K

This is how the improvements get "changed" to capital costs. They are added to the cost basis and then the portion that was taken as depreciation is subtracted.

Once you fill in the ?? values and you have your adjusted cost basis, you can calculate your long term capital gain. That is:
+ sale price -- $400K
- sales expenses -- $20K
- adjusted cost basis -- so far $85K, but it will go up when you fill in the ?? numbers

So far the estimates you are getting for your capital gains are too high because the cost basis you're using is too low. See IRS Pub 551 for more detail on calculating the cost basis of assets.



Thank you for taking the time to work the numbers.
cost of the land was about 40K back then
cost for original loan ?? not sure how to get those numbers, can I guesstimate


costs of all improvements -- can I add in costs like a roof put on before I started renting, new AC unit put on 12 years ago?



These are questions I'll ask the tax preparer .....
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Old 08-13-2021, 07:21 AM   #24
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Originally Posted by stephenson View Post
Iím not seeing overreach at all.

Your investment has grown a lot (especially related to your normal income) , you donít like paying taxes on your profits - which usually means the profits are not enough for you to rationalize the taxes.

So, you cash out - this part makes sense.

Am I missing something?

Other than what we all know - no one likes paying taxes.

Thanks for answering the post.


See my post for this reply...

https://www.early-retirement.org/for...ml#post2648017
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Old 08-13-2021, 07:26 AM   #25
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Iím not seeing overreach at all.

Your investment has grown a lot (especially related to your normal income) , you donít like paying taxes on your profits - which usually means the profits are not enough for you to rationalize the taxes.

So, you cash out - this part makes sense.

Am I missing something?

Other than what we all know - no one likes paying taxes.

Thanks for your input, my response is in this post.....


https://www.early-retirement.org/for...ml#post2648017
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Old 08-13-2021, 07:33 AM   #26
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The thing that sucks about selling a rental property is the depreciation recapture. That means that you have to pay tax at ordinary income rates on the amount of depreciation you have taken on the property. I was not thrilled to learn about this, but as long as you invested the tax savings from the depreciation expense every year, you usually come out ahead. I made an Excel template to walk through an example which I'll share.

Edit: oh well, it won't let me attach the Excel template for some reason.
Attached Files
File Type: pdf Rental property recapture.pdf (140.9 KB, 6 views)
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Old 08-13-2021, 07:35 AM   #27
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I’m not seeing overreach at all.

Your investment has grown a lot (especially related to your normal income) , you don’t like paying taxes on your profits - which usually means the profits are not enough for you to rationalize the taxes.

So, you cash out - this part makes sense.

Am I missing something?

Other than what we all know - no one likes paying taxes.

Have no problem paying taxes on a profit , if it's fair. In no way do I see this gouging as fair.

Besides the obvious act of forcing landlords to carry the burden of "non payment of rent" during the pandemic, there are other little things.

One that clearly irked me was the passage of a bill that mandated all homes in California have to have carbon monoxide detectors .

Why is that a mandate, can't people decide for themselves this issue? That's a rhetorical question.

This bill clearly is written for the manufacturers and who writes those bills...a politician certainly getting a donation.
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Old 08-13-2021, 07:40 AM   #28
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OP, you probably are aware of this already, but I see you have "basis for depreciation 78K", make sure you also reduce your gain by the cost of land. The land isn't depreciable so it is basis that is in addition to the depreciable basis, which will reduce the taxable gain.
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Old 08-13-2021, 07:46 AM   #29
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OP if you remember come back after tax time and tell us how much you payed in taxes.
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Old 08-13-2021, 08:09 AM   #30
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This sounds like the OP did not understand how rentals are treated by the IRS. And, setting aside the Federal government actions during the COVID national emergency, this lack of understanding clearly has created part of the anger.

Btw, we installed carbon monoxide detectors in our rental houses when we purchased them. We also replaced all smoke detectors at that time. We maintain the properties well and want our clients to be happy.

Further, we renovated them … so we could get more rental income and be able to sell if we thought appropriate to the market.

But, our long term goal was to use the properties as trans generational asset transfer devices.
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Old 08-13-2021, 08:30 AM   #31
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Originally Posted by workmyfingerstothebone View Post
cost for original loan ?? not sure how to get those numbers, can I guesstimate


costs of all improvements -- can I add in costs like a roof put on before I started renting, new AC unit put on 12 years ago?
If you don't have info on the original closing costs, then you could make an estimate, but if you got audited (very unlikely), the IRS could disallow it. Anyway, the allowed closing costs are usually only a few hundred dollars. In California residential purchases it's basically just the title insurance, escrow fee and recording fee. Your other closing costs, such as points on the mortgage and property tax were deducted on your taxes over the years. If something was taken as a deduction, it's not part of your basis.

And yes, your basis includes the cost of improvements for the entire time you owned the home. Generally anything that's a permanent addition that would be sold with the house counts: built-in appliances, wall-to-wall carpeting, wood floors, cement patio, new roof, AC, etc. Repairs and normal upkeep, such as painting or power washing don't count, but you can deduct those as business expenses if you did them during the time that you rented out the house. The other tricky thing is that an improvement that is later replaced no longer counts towards your basis. So if you bought new carpeting after you'd owned for 10 years and again after 25 years, only the second carpet is part of the basis.
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Old 08-13-2021, 08:30 AM   #32
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Originally Posted by stephenson View Post
This sounds like the OP did not understand how rentals are treated by the IRS. And, setting aside the Federal government actions during the COVID national emergency, this lack of understanding clearly has created part of the anger.

Btw, we installed carbon monoxide detectors in our rental houses when we purchased them. We also replaced all smoke detectors at that time. We maintain the properties well and want our clients to be happy.

Further, we renovated them Ö so we could get more rental income and be able to sell if we thought appropriate to the market.

But, our long term goal was to use the properties as trans generational asset transfer devices.
If you are referring to the stepped up basis upon death, that is potentially going away.

I had 34 rental houses and was retired to the extent I could be. I am down to 18. There is no way I wanted to be in my 70s or 80s or 90s and have to be managing rental properties. So as people move, Iím selling. Iíve just had to limit my sales to no more than three a year because of the enormous tax hit.
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Old 08-13-2021, 08:53 AM   #33
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We've had the house 32 years, so the appreciation isn't that compelling. Averages to about $9300/yr appreciation. In the first few years (2-4) that's almost 9.5% but in the majority of the years it's more like 3.1% to 3.73%.


That's all before adding in any costs for maintenance, taxes, insurance. So the total yield is a little lower.


Only rented 11 years and in no way did the depreciation make up for the gouging we'll take from the State and Government. I think it depreciated about 3500/year. If I guess we paid 20%fed taxes then that comes to 700/year. Do that for 11 years and I saved 7700.00 in fed taxes, even less in state (my guess is $2000 in state taxes).



So for the privilege of saving less than 10K in taxes over 11 years, the state and government are going to charge me 70K to 90K WTF!


Others have mentioned it and the problem is the sale is a one time event so all the taxes come due in that one year.
It would be nice to spread that out.... managing my taxes for the future.
I'm confused... you say that you owned the house for 32 years but only rented it for the past 11 years... what did you do with the house in the first 21 years that you owned it?

If you had sold the house at the time that you decided to rent it out after owning it 21 years, what would your taxes have been on the sale?
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Old 08-13-2021, 08:56 AM   #34
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Sure, it’s been discussed by President Biden, and has a few previous presidents, before.

There has already been a lot of special interest group posturing on the topic.

IMO it is unlikely, but certainly possible.

Guess would need to decide in that case to sell and pay taxes, or let the kids sell (or rent) and pay taxes - either group would net significant profit.

From a national perspective, tax income is way lower than it needs to be (deficit and debt have been growing for decades) - wars have not been paid for, etc. So, taxes will be going up in a variety of contexts.
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Old 08-13-2021, 09:01 AM   #35
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I'm confused... you say that you owned the house for 32 years but only rented it for the past 11 years... what did you do with the house in the first 21 years that you owned it?

If you had sold the house at the time that you decided to rent it out after owning it 21 years, what would your taxes have been on the sale?
That's the tricky part if they lived in the house and then sold it the taxes might well have been zero...
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Old 08-13-2021, 09:06 AM   #36
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Sure, itís been discussed by President Biden, and has a few previous presidents, before.

There has already been a lot of special interest group posturing on the topic.

IMO it is unlikely, but certainly possible.

Guess would need to decide in that case to sell and pay taxes, or let the kids sell (or rent) and pay taxes - either group would net significant profit.

From a national perspective, tax income is way lower than it needs to be (deficit and debt have been growing for decades) - wars have not been paid for, etc. So, taxes will be going up in a variety of contexts.
The problem is too many people not being required to pay federal taxes at all. The higher income folks are picking up most of the tab. Not enough people paying their fair share or any share at all. Add all the wasteful and unfunded spending, and here we are.
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Old 08-13-2021, 09:11 AM   #37
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The problem is too many people not being required to pay federal taxes at all. The higher income folks are picking up most of the tab. Not enough people paying their fair share or any share at all. Add all the wasteful and unfunded spending, and here we are.

With all your rentals you must have known how the taxes on them worked..


It's not a surprise.



No one likes paying taxes...
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Old 08-13-2021, 09:34 AM   #38
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With all your rentals you must have known how the taxes on them worked..


It's not a surprise.



No one likes paying taxes...
Of course I do. Maybe not going in. The first one I sold I owned for 33 years. I wasn’t thinking of potential tax consequences 33 years ago.

I think the depreciation recapture is what throws people off. Especially when you have no choice about it. You can’t opt to “not” claim the depreciation. And when you are in a lower tax bracket while “depreciating” it and then in a higher one when you sell it, it seems more like a trap and cost you more than you benefitted from it.

So the whole “well you get a tax benefit because you get to claim depreciation” is a misnomer. Because it is more of a penalty than a benefit in reality.

It’s not so much a dislike of paying taxes. It’s more a dislike of paying such an exorbitant amount compared to others who pay little to nothing, who take no risks, and who don’t provide a valuable public service like affordable housing for others.
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Old 08-13-2021, 09:42 AM   #39
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The problem is too many people not being required to pay federal taxes at all. The higher income folks are picking up most of the tab. Not enough people paying their fair share or any share at all. Add all the wasteful and unfunded spending, and here we are.
I dunno, I don't see taxes as being very unfair at all. Do we really expect a married couple that earns less an $25,100 to pay income taxes? (They already pay SS taxes).

Below is a table of federal income taxes in 2021 for a MFJ couple compared to a 19% flat tax that would raise the same amount of tax. Lower income would pay a lot more while upper income would get a minor break.

IncomeTaxAfter-tax IncomeTax BurdenMarginal Tax Rate Flat TaxAfter-tax IncomeChange in taxAdditional Tax Burden
40,0001,49038,5103.7%  7,63332,3676,14315.4%
80,0006,19073,8107.7%11.8% 15,26564,7359,07511.3%
120,00012,375107,62510.3%15.5% 22,89897,10210,5238.8%
160,00021,175138,82513.2%22.0% 30,531129,4699,3565.8%
200,00030,018169,98215.0%22.1% 38,163161,8378,1454.1%
240,00039,618200,38216.5%24.0% 45,796194,2046,1782.6%
280,00049,418230,58217.6%24.5% 53,429226,5714,0111.4%
320,00058,818261,18218.4%23.5% 61,062258,9382,2440.7%
360,00068,822291,17819.1%25.0% 68,694291,306-1280.0%
400,00081,622318,37820.4%32.0% 76,327323,673-5,295-1.3%
440,00094,422345,57821.5%32.0% 83,960356,040-10,462-2.4%
480,000108,304371,69722.6%34.7% 91,592388,408-16,711-3.5%
520,000122,304397,69723.5%35.0% 99,225420,775-23,079-4.4%
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Old 08-13-2021, 09:43 AM   #40
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Seriously? You think taking away a landlords legal protection under the law isn’t overreach? How would you feel being told you had to give your extra car away to someone who was free to use because the government felt they needed it more than you do for going on two years with no compensation while you were expected to make the car payment, pay the taxes, insurance and replace the tires, oil and perform all other required maintenance while they were free to use it- and in some cases you were also required to keep it filled with gas for their use?

You think there is a shortage of affordable rental homes now…we haven’t see anything yet. This is one of the most egregious examples of government overreach ever.
In my state/county we have state wide rent control. I can't do a no cause eviction even if covid goes away. If I want to sell the place I can only sell it to someone who will use it as their primary residence. I have to pay $4500 in moving expenses to the tenant. These are other examples of government over reach.
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