Need help on capital gains from real estate sale

[ReadyAimFired]

Is there someone on this board who could answer a couple of private questions on the sale of a house and capital gains? Please pm me.

 

[REWahoo]

RAF, since this is an anonymous internet board, I'd be careful in relying on any information gathered from an individual. Far better to post your questions to the entire board so you can benefit from multiple inputs which are almost always more accurate than one-off responses.

 

[ReadyAimFired]

O.K. good advice. Well, I have owned a home for 13 years. I didn't use it as my residence but allowed a friend I knew prior to buying the house to live there. We had no rental agreement, and she is the only one who ever lived there. I made no money every month as she paid me the cost of the mortgage and that did not change for all 13 years. I even had the water bill and electric bills in my name for a portion of the time. I have never claimed depreciation as I didn't consider it a rental home. I recently sold it in Sept for a profit. I am expecting to pay capital gains because I answered no at the closing to living there as my primary residence. How do I handle this tax situation? I will be more that willing to answer any and all questions. Thanks in advance. I have set aside money to pay capital gains but am really confused by the depreciation side of things. Also I made a ton of improvements when she moved out like a new roof, appliances, upgraded to the bathroom, flooring and so on. I forced her out due to the fact that she was allowing the house to get run down. The initial plan had been, due to her horrible credit, that I would continue having the house in my name but allow her to pay down the mortgage and eventually giving the house to her once I made a small profit. (i.e, her paying 35 years for a 30 year mortgage).

 

[Souschef]

I do not know your entire situation, but those improvements are "fix up" expenses to sell the house and can be used to increase your cost basis.
I just sold my rental, but had filed a schedule C for the income, expenses, and depreciation every year.
When I sold, I had to recapture all the depreciation and add it to the sale price. You cannot include depreciation.

 

[kaneohe]

sounds like a rental to me.........renter stayed there too many days and you didn't stay enough............... a rental, you need to account for depreciation even if you didn't take it. This would lower your basis and increase your gains.
http://blogs.hrblock.com/2012/08/16/how-renting-out-your-extra-bedrooms-affects-your-taxes/

 

[pb4uski]

Hate to be the bearer of bad news, but IMO technically, the property was a rental since you accepted money for your friend's use of the property so depreciation recapture comes into play even though you didn't depreciate the property.

Your best bet is to hire a CPA. They'll likely recommend amending any past returns that are still open to being amended to include Schedule E and depreciation of the property so you get some benefit and then the profit from the sale will be bifurcated between depreciation recapture which will be taxed as ordinary income and capital gains which will be taxed at capital gains rates.

Is your gain significant? What tax bracket are you in? If the gain isn't and you are not in a high tax bracket then it might be easiest just do some best estimates of the depreciation recapture and cross your fingers as the cost to have a CPA do your 2015 return and amend prior returns might be significant.

 

[ReadyAimFired]

I bought the property at 67,000 and sold it for 97,500. I put approx. 14000 into the remodel and had about 7500 in closing costs if that helps. Can someone give me a ballpark estimate on what my tax may be for these numbers. I owned it for 13 years. I am in the 25% tax bracket.

 

[RunningBum]

There's a topic on this over in bogleheads, that looks to have a lot of good discussion:
https://www.bogleheads.org/forum/viewtopic.php?t=127624

I didn't read it all, but lots of disagreement. I don't think there's a real difference between renting to a family member or friend so I think the thread applies. I didn't read to the end to see if there was consensus reached.

I started typing in a longer response but I don't know enough about the topic. One thing I'll say is don't assume that renting for the mortgage amount means there was no profit. The expense is not the full mortgage, but the mortgage interest expense, taxes and insurance. There's a certain amount of principal in there that would be profit. Maybe you had enough other expenses in there to make it non-profitable. It sounds like you weren't renting for the full market value.

Anyway, read that thread, and read the tax code sections that some of the posters point to. If it's not clear to you from that, I'd get a tax pro to look at your situation. Relying on an anonymous message board isn't the best idea and expecting someone to give you professional help for free isn't too likely.

 

[RunningBum]

The bigger issue in that thread I referenced, IMO, is whether you should have been declaring the rental income on your taxes. You didn't see if you had been or not.

 

[Senator]

It was a rental, plain and simple. You should have depreciated the building, if you did not you may still have to pay any depreciation recapture taxes on the sale anyway. Even if you did not deduct it. Maybe you could count it as a gift?

You likely could have done the project in a proper way and offset active income over the past few years.

I would discuss with a tax professional.

 

[Letj]

Assuming an original basis of $67K, you would have depreciated approximately $2,400 per year using the straight line method. Even if you didn't and therefore did not get a benefit you still have to recapture for 13 years. Your tax basis should be selling price + selling cost + depreciation of approximately $129K. You cost basis should be $67K + $14K, $81K for a gain of $48K of which $32K is taxed at ordinary income tax and the rest at capital gains. Depending on your income and tax bracket you may or may not have a big bill.


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[Letj]

I did not consider your closing cost. Not all closing costs are deductible so you'll need to do some research. This really isn't hard. I do my taxes myself and I have sold rentals both at a loss and at a gain.


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[ReadyAimFired]

I would be in the 25% tax bracket. So 32k @ 25% and 16K @ 15%?

 

[haha]

Hard to say, but he may have overpaid or underpaid taxes for years. This is not a simple situation, though likely a common enough one.

Ha

 

[Souschef]

I

I would discuss with a tax professional.

That is the best advice!

 

[ReadyAimFired]

will do...thanks

 

[pb4uski]

First... see a CPA.

But from what you've posted, to give you a rough idea... you paid $67k and that purchase price would need to be bifurcated between land and building. Your property tax appraisal from when you bought the house would give you an idea of how to allocate the $67k, but for now, let's say it was $12k for the land and $55k for the building.

Your annual depreciation over a 27.5 year life would be ~$2k a year or $26k for the 13 years you have owned it. That would reduce your basis from $67k to $41k before the recent improvements, and $55k after the $14k in pre-sale improvements.

Assuming your closing costs are all deductible (was most of it the realtor's commission?) then your net sales price is $90k and your gain is $35k ($90 less $55k adjusted basis). $26k is ordinary income and $9k is LTCG.

Those are rough numbers and you and your CPA need to sort through the details, but I suspect that is roughly the order of magnitude of your gain... so roughly $30-40k of gain with $9k LTCG and the rest ordinary gain depending on how the details sort out. Needless to say, YMMV.

 

[Sunset]

Hate to be the bearer of bad news, but IMO technically, the property was a rental since you accepted money for your friend's use of the property so depreciation recapture comes into play even though you didn't depreciate the property.

Your best bet is to hire a CPA. They'll likely recommend amending any past returns that are still open to being amended to include Schedule E and depreciation of the property so you get some benefit and then the profit from the sale will be bifurcated between depreciation recapture which will be taxed as ordinary income and capital gains which will be taxed at capital gains rates.

Is your gain significant? What tax bracket are you in? If the gain isn't and you are not in a high tax bracket then it might be easiest just do some best estimates of the depreciation recapture and cross your fingers as the cost to have a CPA do your 2015 return and amend prior returns might be significant.

+1
OP needs to get with a CPA quickly, as amending previous returns is the only way to undo some of the bad planning he did here.

The recapture of depreciation is not optional (as some other posters suggest), because IRS does not care if you took it or not, you still have to recapture as if you took it.

No good deed goes unpunished

 

[Fedup]

You don't need a CPA for that small amount, but agree you need to recapture the depreciation, but only on the house and not the land.


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[Letj]

First... see a CPA.

But from what you've posted, to give you a rough idea... you paid $67k and that purchase price would need to be bifurcated between land and building. Your property tax appraisal from when you bought the house would give you an idea of how to allocate the $67k, but for now, let's say it was $12k for the land and $55k for the building.

Your annual depreciation over a 27.5 year life would be ~$2k a year or $26k for the 13 years you have owned it. That would reduce your basis from $67k to $41k before the recent improvements, and $55k after the $14k in pre-sale improvements.

Assuming your closing costs are all deductible (was most of it the realtor's commission?) then your net sales price is $90k and your gain is $35k ($90 less $55k adjusted basis). $26k is ordinary income and $9k is LTCG.

Those are rough numbers and you and your CPA need to sort through the details, but I suspect that is roughly the order of magnitude of your gain... so roughly $30-40k of gain with $9k LTCG and the rest ordinary gain depending on how the details sort out. Needless to say, YMMV.

Yes you would need to exclude the cost of the land (in my situation I assumed 20% of purchase price) and don't forget to add back the depreciation to your selling cost.


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[RE2Boys]

You need at least an enrolled agent, or a CPA office to straighten this out. It will probably be to your best interest to amend your 2012-2014 returns to take advantage of depreciation. Don't know how you handled the mortgage interest and property taxes all these years which would need to be looked into.

Some may say it is easy, but the fact that you have not been reporting this rental would indicate you are not familiar with income tax reporting.

 

[Fedup]

You need at least an enrolled agent, or a CPA office to straighten this out. It will probably be to your best interest to amend your 2012-2014 returns to take advantage of depreciation. Don't know how you handled the mortgage interest and property taxes all these years which would need to be looked into.

Some may say it is easy, but the fact that you have not been reporting this rental would indicate you are not familiar with income tax reporting.

The house is already rented for 35 years, if I'm not mistaking. You can depreciate the first 27.5 years, therefore it might not be possible to recapture. Depreciation is gone.


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[pb4uski]

I think he said the house was owned and rented for 13 years.

 

[Sunset]

I think he said the house was owned and rented for 13 years.

Correct, and he needs a CPA as he doesn't know the IRS rules about rental properties, so likely he is missing other things as well.

And the CPA cost will be deductible.

 

[pb4uski]

.....And the CPA cost will be deductible.

Assuming that the OP itemizes.