Taxes on sale of real estate

[HawkeyeNFO]

So we have a contract to sell our rental property in MD, and apparently we will have about $22,000 withheld by the state because we are nonresidents. It was a house we last lived in during 2009. What they do is charge 7% of the difference between the sales price and mortgage payoff amount.

Getting out of the landlord business is sweet sorrow!

 

[Souschef]

Getting out of the landlord business is sweet sorrow!

I agree, It helped with taxes up until I sold it in 2014. Last year I paid zero taxes, but this year is a bear

 

[Senator]

Do not forget, you will have to recapture depreciation at a 25% federal tax rate. Plus any capital gains.

It will be MUCH worse than 7% before it's over.

 

[HawkeyeNFO]

Do not forget, you will have to recapture depreciation at a 25% federal tax rate. Plus any capital gains.

It will be MUCH worse than 7% before it's over.

Luckily, being military, the "2 of 5" eligibility period can be suspended up to 10 years according to IRS publication 523. So capital gains tax shouldn't be a factor in our specific case. But yeah, the depreciation recapture won't be fun.

 

[pb4uski]

Do not forget, you will have to recapture depreciation at a 25% federal tax rate. Plus any capital gains.

It will be MUCH worse than 7% before it's over.

I suspect not... the 7% is for state income tax on the gain, not federal. And MD's state tax rate tops out at 5.75% so I'm thinking they will be getting a big refund.

 

[Senator]

I suspect not... the 7% is for state income tax on the gain, not federal. And MD's state tax rate tops out at 5.75% so I'm thinking they will be getting a big refund.

True, but the Feds will take a bunch after the 7% when he files taxes. Or needs to make an estimated tax payment.

 

[pb4uski]

True, I guess I thought that was obvious.

 

[brucethebroker]

Gains on Rental Property

No surprise that your state treats you as a filthy capitalist. Shame on you for making a profit when so many are suffering!

In Indiana, the evil landlords are taxed at 2-3 times what owner-occs pay for property tax. When that surprise tax increase was made law about 8 years ago, my net rental income dropped by over 20%. Can't hit up the renters for all of that at once-took nearly 6 years to recover.

 

[Amethyst]

MD counties add-on their own bite to the state's chomp. These additional taxes range between 1.25% and 3.20% depending on the county of residence. For example, we paid a marginal state/local tax rate last year of 8.75%.

A.

I suspect not... the 7% is for state income tax on the gain, not federal. And MD's state tax rate tops out at 5.75% so I'm thinking they will be getting a big refund.

 

[harley]

So we have a contract to sell our rental property in MD, and apparently we will have about $22,000 withheld by the state because we are nonresidents. It was a house we last lived in during 2009. What they do is charge 7% of the difference between the sales price and mortgage payoff amount.

Getting out of the landlord business is sweet sorrow!

As I remember, we had to pay a hefty fee for building our house in MD, because we were moving there from out of state. I don't have the details, but I remember being really pissed off about it. We're not full time residents there now (FL for 6+ months), but if I end up having to pay another fee when we finally sell that house I'll be even more PO'ed. I may have to...hmmm, need to spend some time working on an appropriate revenge.

 

[RE2Boys]

Many states are starting to collect potential taxes due from non-residents as often in the past the non-resident never files the tax return like they were supposed to.
The OP will need to file a non-resident (MD) return, then file a resident return for his official home of record showing the sale on both returns. For his official home of record, he should get a credit for any taxes paid to MD to avoid double taxation.
Of course, if he lives in a non-income tax state, no credit.......but any taxes paid are deductible on federal Schedule A.

 

[HawkeyeNFO]

Of course, if he lives in a non-income tax state, no credit.......but any taxes paid are deductible on federal Schedule A.

Yep. Florida resident here.

 

[pb4uski]

MD counties add-on their own bite to the state's chomp. These additional taxes range between 1.25% and 3.20% depending on the county of residence. For example, we paid a marginal state/local tax rate last year of 8.75%. ....

Ouch.

 

[Nords]

So we have a contract to sell our rental property in MD, and apparently we will have about $22,000 withheld by the state because we are nonresidents. It was a house we last lived in during 2009. What they do is charge 7% of the difference between the sales price and mortgage payoff amount.

Getting out of the landlord business is sweet sorrow!

Congratulations on losing your landlord career! I bet you won't miss that a bit.

The Facebook group "Military Landlords" is full of sad tales of tax woes. At least one poster is arguing that taking depreciation wasn't worth the effort because the depreciation recapture tax won't be big enough for the state or the IRS to come after her. Yeah.

Last year spouse and I had a long, occasionally intense discussion about selling our rental. We've rented it out for 19 of the last 22 years, and there's not much depreciation left. Taxes (depreciation recapture, cap gains, both state & fed AMT) would be brutal unless we did a 1031 exchange.

But our tenants have become borderline hoarders (after nearly seven years in there) and now it's impossible to accomplish any maintenance or repairs indoors without a forklift. I felt that real estate was fairly fungible, we'd grow the after-tax profits faster in the stock market for a decade or two, and we'd buy another elder-friendly home someday if we needed it. She feels that our rental is the perfect age-in-place residence for later in life, and I agree with that. She also feels that it's worth three more decades of landlording pain. Hmmm.

We've spent the last six months desultorily searching for "fungible" places that we could buy later in life. That's turned out to be a lot harder than it seems, and it turns out that our rental delivers extraordinary value by virtue of everything that's grown up around it since we bought it in 1989.

There's also the point that by the time our tenants move out (later 2016?) they'll have paid us nearly $250K in rent.

So my landlord exit strategy appears to be "probate".

 

[newtoseattle]

depreciation and real estate

Sorry to add on to this post - but I think relevant. We rented out our house the first year we owned it.

No idea when/if we'll sell at some point, but I've kind of been assuming the federal tax would be something like (1/however many years we owned it) times tax amount? (i.e. it'll be adjusted for the fact that it was only a rental for one year)

Is it the (total capital gains) divided by (years owned) times (years used as a rental)? times (25%)?

thanks

 

[Sunset]

Sorry to add on to this post - but I think relevant. We rented out our house the first year we owned it.

No idea when/if we'll sell at some point, but I've kind of been assuming the federal tax would be something like (1/however many years we owned it) times tax amount? (i.e. it'll be adjusted for the fact that it was only a rental for one year)

Is it the (total capital gains) divided by (years owned) times (years used as a rental)? times (25%)?

thanks

Not a tax specialist, but this is my take on it:

I would view it as: how much did your house appreciate in that 1 year from the basis (cost). Later if it doubled in value, that appreciation is not part of it.
Sort of like pretending after renting it for 1 year, you sold it.
I don't know if that is really what the IRS rules say as sometimes they simply don't make sense. (like forcing you to take depreciation).

The recapture capital gain (for the depreciation you took or should have taken) is taxed at 25% .

 

[HawkeyeNFO]

Well, there is a good ending here.....With the military verbage in the internal revenue code about deferring the 2 of 5 years period to determine if a house is a primary residence, Maryland determined that we owed zero sales tax. We did pay it at closing last March, but the title company held it in escrow since then. I guess they forgot that they had our $$$, and this whole time, I thought the state had it. After a few phone calls, paperwork, and e-mails, the $20,000 is now back in my checking account!

 

[Bamaman]

Remind me to never move to Maryland. I remember visiting a MD relative just outside of D.C. and I was absolutely shocked at what property taxes were on a regular size home.

On my last house, our Alabama property taxes were $650 on 3350 square feet on 4 acres. But because my wife was on social security disability, we had no property taxes on our principal residence. We recently moved into a 5200+ square foot house with 5 bedrooms, 5 baths and two double car garages, and our property taxes will be zero. Needless to say I really appreciate the dumb politicians of this state--ignoring property taxes while the state's completely without money.

 

[bearkeley]

OP - are you sure it's a tax on the difference between mortgage and sales price? We have several rentals in MD and thought it was a tax based on your gain (sales price - cost basis). I am not sure about this but also thought all passive losses would also count towards your gain....

 

[HawkeyeNFO]

OP - are you sure it's a tax on the difference between mortgage and sales price? We have several rentals in MD and thought it was a tax based on your gain (sales price - cost basis). I am not sure about this but also thought all passive losses would also count towards your gain....

Yes and no. On the initial tax form you fill out at the closing, it takes your mortgage into account. But then when you actually file taxes the next Spring, it is actually just about the gain.

I'm just happy to be exempt from this tax altogether.

 

[brucethebroker]

Well, there is a good ending here.....With the military verbage in the internal revenue code about deferring the 2 of 5 years period to determine if a house is a primary residence, Maryland determined that we owed zero sales tax. We did pay it at closing last March, but the title company held it in escrow since then. I guess they forgot that they had our $$$, and this whole time, I thought the state had it. After a few phone calls, paperwork, and e-mails, the $20,000 is now back in my checking account!

What? You suspect that a title company was dragging their feet about returning your money? Sounds like you are a skeptic.....

 

[HawkeyeNFO]

They had to pay 3% interest on it. State law for escrow accounts.

 

[ArkTinkerer]

The Facebook group "Military Landlords" is full of sad tales of tax woes. At least one poster is arguing that taking depreciation wasn't worth the effort because the depreciation recapture tax won't be big enough for the state or the IRS to come after her. Yeah.

I hope they are aware that you have to pay depreciation recapture even if you don't take the depreciation! I wish I could get away with a fraction of the financial moves our government uses!

 

[Dawg52]

On my last house, our Alabama property taxes were $650 on 3350 square feet on 4 acres. But because my wife was on social security disability, we had no property taxes on our principal residence. We recently moved into a 5200+ square foot house with 5 bedrooms, 5 baths and two double car garages, and our property taxes will be zero. Needless to say I really appreciate the dumb politicians of this state--ignoring property taxes while the state's completely without money.

AL does own the distinction of being in the top 5 in the highest average sales tax rates. But I'm glad they are keeping property tax low while I own a condo on the coast.

The five states with the highest average combined state and local sales tax rates are Tennessee (9.46 percent), Arkansas (9.30 percent), Louisiana (9.01 percent), Alabama (8.97 percent), and Washington (8.90 percent).

State and Local Sales Tax Rates in 2016 | Tax Foundation