Selling rental, what taxes to expect

[jollystomper]

This thread again reminds me that I was not born with the "invest iand manage rental properties" gene . More power to those who do have it.

I have always viewed relatively higher taxes as one of the "risks" one trades off against the "rewards" of higher income an an nicer lifestyle. Life is inherently unfair, and we will never be able to agree on what is a "fair" tax. As was stated before, "fair" is a nebulous definition and, like beauty, is in the eye of the beholder. Every time I have asked someone specifics on what they think is fair, the specifics can easily be seen as unfair to others. For example, I may not think it "fair" that "rich" people can manipulate their income to get ACA subsidiaries when they could well afford to pay the full rate. Those getting the ACA would not see that as "fair", and would say, among other things, "I am just doing what is legal". But, as we see with taxes, what is legal is not always viewed as "fair". Just as me getting a pension because I was born 2 years earlier than fellow Megacorp employees who had the same number of years of service is not "fair".

It was mentioned that if you do not like paying higher taxes, you can leave the U.S. I have an easier solution: If you do not like paying higher taxes, just stop earning so much . No one is being forced to make a lot of money. Donate your assets and lower your income to where you can pay little or no taxes. Of course, lower income comes with other issues beyond just taxes - again, a tradeoff in life.

So while it is clear that those with rental properties do have a myriad of challenges (the tax/gain calculation alone, regardless of the actual tax paid, has my head spinning ), it is still a choice, life is unfair and one cannot have it all, and it part of a risk to achieve a greater reward.

 

[Joylush]

This thread again reminds me that I was not born with the "invest iand manage rental properties" gene . More power to those who do have it.

I have always viewed relatively higher taxes as one of the "risks" one trades off against the "rewards" of higher income an an nicer lifestyle. Life is inherently unfair, and we will never be able to agree on what is a "fair" tax. As was stated before, "fair" is a nebulous definition and, like beauty, is in the eye of the beholder. Every time I have asked someone specifics on what they think is fair, the specifics can easily be seen as unfair to others. For example, I may not think it "fair" that "rich" people can manipulate their income to get ACA subsidiaries when they could well afford to pay the full rate. Those getting the ACA would not see that as "fair", and would say, among other things, "I am just doing what is legal". But, as we see with taxes, what is legal is not always viewed as "fair". Just as me getting a pension because I was born 2 years earlier than fellow Megacorp employees who had the same number of years of service is not "fair".

It was mentioned that if you do not like paying higher taxes, you can leave the U.S. I have an easier solution: If you do not like paying higher taxes, just stop earning so much . No one is being forced to make a lot of money. Donate your assets and lower your income to where you can pay little or no taxes. Of course, lower income comes with other issues beyond just taxes - again, a tradeoff in life.

So while it is clear that those with rental properties do have a myriad of challenges (the tax/gain calculation alone, regardless of the actual tax paid, has my head spinning ), it is still a choice, life is unfair and one cannot have it all, and it part of a risk to achieve a greater reward.

Very true. One of the reasons I’m not married is taxes, ACA subsidy included. We can manipulate my partner’s income so he qualifies for it in full and doesn’t pay a premium. But I think that’s quite fair considering the amount of taxes I pay and I’m not breaking a single rule. Just like the single Mom who doesn’t marry her children’s father does because doing so would cause all her freebies to disappear.

I will give it away before giving it to the government. And once you have enough accumulated you can certainly stop earning more, live a comfortable life and reduce your income taxes to little to nothing. But why do we want a system that encourages that when it would bring in less revenue? Why not just make the tax less punitive? That is how you generate more of it.

 

[pb4uski]

You call paying an exit tax NOT paying US tax upon leaving? Maybe you can avoid FUTURE taxation, but you DO pay US taxes.

If the exit tax is the extent of it as you suggest (I'm not so sure it is - heh, heh, you can't even tax-escape California taxes within the USA!!) most STILL can not leave the US without paying up. So, leave if you want to but the USA WILL have the last word tax wise.

I never said or suggested that if you left that you didn't have to pay an exit tax so please stop lying.

What I said is that if you didn't like US taxes then you can always move... you can pay an exit tax, move your assets out of the US and never pay US income taxes again. People do it... The 5 most famous people to renounce US citizenship

What you said, which was totally WRONG and you haven't conceded was totally wrong, was that the only ways to escape US income taxes were to "leave, have nothing in assets and make no money going forward" or to "illegally transfer your assets to one of the very few countries who have no tax treaty with the US" and you falsely claimed "Baring these two options - you WILL pay US taxes, even if you don't live in the US". I just pointed out that you were wrong, hadn't done your homework and that there was a way to escape future US taxation.

ETA: I noticed that you quoted my posts but didn't chose to repeat your false post....

I hate to tell you this, pb4, you CAN leave, but you still owe USA taxes. Only 2 ways around that - and only one of them is legal. You leave, have nothing in assets and make no money going forward. If you can live like that the US tax man will leave you alone. The other way is to illegally transfer your assets to one of the very few countries who have no tax treaty with the US. That's possibly doable, but it's illegal. You'll never come back to your 50th HS reunion or attend your parents or friends funerals "back home."

Baring these two options - you WILL pay US taxes, even if you don't live in the US. Fail to send "your fair share" and they'll take the assets you left behind. SO, let's hear no more about "leaving" if you don't like it. That would change nothing. (I think you can change your citizenship and AFTER 10 years, stop paying US taxes.) YMMV

 

[rothlev]

the thing that I think is unfair is the capital gains tax paid on rentals does not account for inflation. ie ) the home you bought for 100k and sold 30 years later for 300k, well the dollars are not equivalent, but you pay tax on the "whole gain"

 

[Joylush]

I hate to tell you this Koolau, but you're full of it.

You can renounce your US citizenship, pay an exit tax as if you liquidated everything, move out and then you will be free of US taxes. Please do is little research so you don't continue to post falsehoods.

https://www.forbes.com/sites/robert...es-how-irs-computes-exit-tax/?sh=951e2a7287d4

https://americansoverseas.org/en/knowledge-centre/us-taxes-and-liability/exit-tax-us/

What are you challenging here? That’s exactly what he said. If you leave, you will pay taxes. Fairly hefty taxes.

And even if you are no longer a citizen if you still own US assets I’m quite sure you still owe taxes on the profits your us assets generate.

Like if I live in a “no income tax state” but I generate income in a state that has income taxes, I must file a non-resident state income tax return and pay taxes on the income generated in the income tax state.

The exit tax you pay may or may not be less than the estate tax you would pay upon death depending on the amount of assets you own.

And while you are a US citizens the US taxes you on your worldwide income. If you are no longer a US citizen you would only be taxed on your US earned income (interest, dividends, rents, royalties) not generally capital gains from stock sales. However real estate capital gains are included capital gains.

(I recently sold a house to one of my immigrant families. We left the wife off the title because it was recommended. He was a legal citizen and she was not. As such, when they sell the house they would withhold 20% of the sale amount which they’d have to then deal with. If she was not on the title that wouldn’t happen so that’s what they opted to do).

 

[Joylush]

the thing that I think is unfair is the capital gains tax paid on rentals does not account for inflation. ie ) the home you bought for 100k and sold 30 years later for 300k, well the dollars are not equivalent, but you pay tax on the "whole gain"

Yes, good observation. But this is the reason the capital gains tax rate is lower than your regular income tax rate, to account for the inflation.

What gets me is the whole estate tax screw over. For assets over the exemption amount:

A house bought for 100k is now valued at 300k. The estate pays 40% of the stepped up basis 300k ($120,000 in tax)

If the house was sold prior to death the very maximum tax that would be due would be $47,600. Because you would only be taxed on the gain of $200,000 and at a rate no higher than the maximum capital gains tax rate of 20% plus the 3.8% Obamacare tax. (I didn’t factor in depreciation recapture for simplicity but regardless the tax due would be much less than $120,000).

 

[rothlev]

On the first part, why? Are these long-term tenants that you just have chosen not to increase the rent on? A friend of mine has somehting like that... he hasn't raised the tenant's rent in probably at least 5 years and probably more. Every year when I do his taxes I mention to him that he should do some rent increase as his costs have gone up but he refuses to do it.... the guy is a good tenant who pays on time and occasionally helps my friend with some things.

On the second part, I'm skeptical and would like to see the citations and cases on that.

If the IRS decides there is not a profit motive then hypothetically they can decide rental not for profit and the rules are different.

 

[MichaelB]

Thanks for an interesting discussion