Selling investment property while on ACA?

[Carpediem]

In your opinion, should ACA subsidies even be a consideration when deciding whether to sell an investment property or not?

We are on year 2 of ACA paying $0 per month for a bronze HSA plan. We have a beach rental condo (short term rentals only) that we purchased in 2015 for approx $150k. Someone is now interested in buying it from us for roughly $300k. We're debating whether to do it or not. The rental income is not much at all due to increasing expenses and our adult kids do not really use it although we thought they would.

I know we'll have capital gains and depreciation recapture to pay at tax time. I'm guessing the net proceeds would be in the neighborhood of $175k.

Has anyone sold property while on ACA and if so, how did it impact you? Should we wait until we're off ACA or does it really matter at all?

 

[captain3d]

Pretty simple. You will not get any ACA refund and will pay the full amount for the year. Consider it part of the selling cost.

 

[Sojourner]

IMHO, you should probably sell it and not worry too much about the loss of ACA subsidies. The red hot (actually, white hot) housing market is bound to cool off (or crash) sooner or later, so there isn't much to be gained by waiting. Meanwhile, if you sell now, you can get busy deploying that $175k profit into some low cost index funds, where the dividends and market growth over the years will easily cover the loss of ACA credits for this one year.

 

[PaunchyPirate]

I didn't sell an investment property, but in my first year of ACA, I willingly chose to sell a boat load of stock for a profit that put me in a situation of needing to repay my entire ACA subsidy for the year. I did the stock sale in late-December, so I had already received 12 months of ACA subsidy.

The stock I sold was starting to fall a lot and I wanted to lock in my profits on it before it went lower. Since that sale was going to push me over the ACA cliff anyway, I decided to sell a large amount of another stock that I wanted to reduce my exposure to. I ripped the bandage off, so to speak.

While paying back the subsidy was painful, my plunging stock value was going to hurt more. And I also solved a problem of being too heavily invested in that other stock.

I chalked the subsidy repayment into the cost of doing the other 2 transactions. The ACA subsidy is only one of many financial considerations I work with each year.

 

[Dash man]

The proceeds may be $175k, but that isn’t your profit. Figure what your taxable net income will be after sales costs and other expenses. Remember you’ll have to pay recapture depreciation costs too at 25%. Did you put any capital improvements into the house? Subtract those from the proceeds. There’s more to consider than ACA subsidies.

 

[mf15]

Same boat except it is medicare that will increase. Need to sell shore
house,27.5 years dep recapture,plus fed cap gain,plus NJ cap gain which is the same as federal for out of state owners. Lots of cap gain tax going down the drain. Not thrilled with NJ tax laws.
Oldmike

 

[Carpediem]

Thank you for the responses so far. Very helpful. Question - Since I will exceed my 2022 estimated income on my ACA 'application', would I update the app with new estimated income after the sale is done? Is that the way it works with ACA - mid-year updates when you have some significant change?

 

[RunningBum]

Thank you for the responses so far. Very helpful. Question - Since I will exceed my 2022 estimated income on my ACA 'application', would I update the app with new estimated income after the sale is done? Is that the way it works with ACA - mid-year updates when you have some significant change?

It's best to update it when things have changed significantly. You could just resolve it at tax time, but I think this count result in an underpayment penalty depending on the rest of your tax situation.

 

[GTFan]

If you project that 8.5% of your AGI will be less than your unsubsidized ACA premium, sell this year because premiums are capped until 2023. You might not have to pay back all the subsidy this year, in other words, even if you go way over the ACA cliff.

 

[Carpediem]

If you project that 8.5% of your AGI will be less than your unsubsidized ACA premium, sell this year because premiums are capped until 2023. You might not have to pay back all the subsidy this year, in other words, even if you go way over the ACA cliff.

You're absolutely right. I noticed yesterday that I still would receive a subsidy even at an income level of $200k. Amazing.

 

[Z3Dreamer]

I knew the purchaser so I did owner financing. Elected installment sale method. Put a pre-payment clause in the mortgage to get me to 2022 (Medicare). Purchaser refinanced in 2022 to pay off the sky high 5.2% I was charging. This allowed me to continue with ACA for 4 years. YMMV

 

[captain3d]

Sky high 5.2% is back. I suspect it will look cheap in a few more months.

 

[cathy63]

...Remember you’ll have to pay recapture depreciation costs too at 25%...

Depreciation recapture is taxed as ordinary income, but capped at 25%. Given the low numbers we're talking about, I think most of the recapture should be in the 12% bracket, maybe some in the 22% bracket. It's only been 7 years, so if half of the original investment was depreciable buildings, less than $20K has been depreciated so far.

 

[cathy63]

Thank you for the responses so far. Very helpful. Question - Since I will exceed my 2022 estimated income on my ACA 'application', would I update the app with new estimated income after the sale is done? Is that the way it works with ACA - mid-year updates when you have some significant change?

Yes, but there's an additional wrinkle. If you have to pay back some of the advance premium tax credit received early in the year because of a windfall that occurs later in the year, that's treated as a tax and the underpayment penalty applies even though you couldn't have known in advance that you wouldn't be entitled to the credit. You might be able to avoid the penalty by filling out Form 2210 Schedule AI. It's been a while since I looked at it though, and it's a difficult form to work with.

If this were me, I'd change my income estimate right now, and I'd bump it a bit higher than it probably really will be in order to cover the excess credits received for the first 3 or 4 months. If the sale falls through and you really are entitled to a higher credit, you'll get it when you do your 2022 taxes.