Selling rental, what taxes to expect

[workmyfingerstothebone]

Finally decided to sell the rental, to much state and government interference.
Will be getting out of the rental business for good.


I know that I need to use a tax preparer this year but wanted to query the forum for their input. Maybe possible issues I'm not accounting for.

So, what can I expect to pay in federal and California taxes?
Some numbers....
Selling price 400K
Fees 20K

Capital improvements 30K (remodel in July 2021)
Depreciation 33K
Basis for depreciation 78K

Income 150K , filing married.

My estimates show about 40K in state tax and 50k in federal , OUCH .

Also, I had a question about depreciation on capital improvements prior to July 2021. If I spent 10k on exterior remodeling in 2013 how do I figure the capital costs as some of it has depreciated?

A little ranting if you please.
For the mom and pop landlords (1 or 2 properties) I was floored at how the government and state taxes the money. These folks are using the funds for retirement in most cases. California simply calls the money normal income, so we get kicked up to almost the highest tax bracket. For the government we get to pay and extra 3.8% for Net Investment Income Tax .

What a bunch of crap .

I could also go on about the Governments taxing and overreaching powers but I'll just drop it .
When I continuously here of free school lunches, free junior college, free health coverage, free basic income .... I get irritated that people believe it's actually free.

The middle and upper income classes are paying for it! Oops, I guess I hadn't finish my rant .


Thanks in advance to anyone willing to run the numbers and offer advice.

 

[Amethyst]

How much did you originally pay for the unit, and what, if any, expenses were associated with buying it?

What other expenses, besides fees, are associated with putting the unit on the market? Painting, landscaping, replacing old fixtures, kind of thing? Also, all the usual selling expenses e.g. property taxes, utilities, mileage to and from the unit. All these would be deductible at sale.

As for the rant, we've paid the 3.8% etc. for years, merely because our pensions are taxed as ordinary income. Darnit, that's our Retirement! We paid into it! Senior Citizens! Fixed Incomes! Just unfair, Congress, grumble grumble...

Finally decided to sell the rental, to much state and government interference.
Will be getting out of the rental business for good.


I know that I need to use a tax preparer this year but wanted to query the forum for their input. Maybe possible issues I'm not accounting for.

So, what can I expect to pay in federal and California taxes?
Some numbers....
Selling price 400K
Fees 20K

Capital improvements 30K (remodel in July 2021)
Depreciation 33K
Basis for depreciation 78K

Income 150K , filing married.

My estimates show about 40K in state tax and 50k in federal , OUCH .

Also, I had a question about depreciation on capital improvements prior to July 2021. If I spent 10k on exterior remodeling in 2013 how do I figure the capital costs as some of it has depreciated?

A little ranting if you please.
For the mom and pop landlords (1 or 2 properties) I was floored at how the government and state taxes the money. These folks are using the funds for retirement in most cases. California simply calls the money normal income, so we get kicked up to almost the highest tax bracket. For the government we get to pay and extra 3.8% for Net Investment Income Tax .

What a bunch of crap .

I could also go on about the Governments taxing and overreaching powers but I'll just drop it .
When I continuously here of free school lunches, free junior college, free health coverage, free basic income .... I get irritated that people believe it's actually free.

The middle and upper income classes are paying for it! Oops, I guess I hadn't finish my rant .


Thanks in advance to anyone willing to run the numbers and offer advice.

 

[ivinsfan]

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.

 

[SheitlQueen]

I'm interested in your question. I am putting one of my rentals on the market next month. I am selling for the reason you are-too much government control over my private property. There is a shortage of rentals in this area and this will be taking a rental off the market as it will be sold to someone who will owner occupy it. Too bad they don't think about this when they pass some of these regulations. I am also tired of dealing with renters. Not looking forward to paying the taxes but am looking forward to edging closer to no longer being a landlord (I will sell my other one next year).

 

[Done]

I’m afraid the sale of the rental makes you one of the targeted wealthy individuals (of the evil landlord variety), at least this year. I ran the numbers through TurboTax 2020, making plenty of assumptions, including:
- 15% of the rental property value is land, not depreciable.
- You’ve owned since 2003 to account for the $33k depreciation to date.

Without selling the rental ($150k of ordinary income with std deduction):
Fed tax $19k
CA tax $7k

Selling rental:
Fed tax $78k
CA tax $37k

Your capital gains from the sale are $320k, making your AGI $470k. This triggers NIIT, plus you’ll have depreciation recapture. You’re paying a total of $89k in taxes on the gain, effectively 28% of it.

There are plenty of tax benefits for landlords along the way, so you could say you’ve been paying artificially low taxes for years, but the tax man does find a way to collect.

Remodeling is a capital expenditure that gets its own entry in your depreciation report (form 4562). You deduct a portion each year, then the total depreciation is recaptured at sale. The software calculates the total prior allowable depreciation.

I don’t know your age or situation, but if you were to keep the rental until you or your spouse passed, the entire basis would be stepped up (in CA as a community property state) and the surviving spouse wouldn’t have capital gains if they then sold the property. Another consideration is a 1031 exchange to defer capital gains.

 

[workmyfingerstothebone]

How much did you originally pay for the unit, and what, if any, expenses were associated with buying it?

What other expenses, besides fees, are associated with putting the unit on the market? Painting, landscaping, replacing old fixtures, kind of thing? Also, all the usual selling expenses e.g. property taxes, utilities, mileage to and from the unit. All these would be deductible at sale.

As for the rant, we've paid the 3.8% etc. for years, merely because our pensions are taxed as ordinary income. Darnit, that's our Retirement! We paid into it! Senior Citizens! Fixed Incomes! Just unfair, Congress, grumble grumble...

As I understand it the IRS looks at the "basis for depreciation" of the unit, this does not include the land. As I mentioned that amount is 78K.


All my expenses are noted in my original post. I think I called it capital costs. This includes " Painting, landscaping, replacing old fixtures, kind of thing? Also, all the usual selling expenses e.g. property taxes, utilities, mileage to and from the unit.".


One issue is I don't understand how earlier items that were depreciated but not completely, get changed to capital costs.



I'm still investigating all the IRS jargon on this matter.


Thanks for your post.

 

[workmyfingerstothebone]

I’m afraid the sale of the rental makes you one of the targeted wealthy individuals (of the evil landlord variety), at least this year. I ran the numbers through TurboTax 2020, making plenty of assumptions, including:
- 15% of the rental property value is land, not depreciable.
- You’ve owned since 2003 to account for the $33k depreciation to date.

Without selling the rental ($150k of ordinary income with std deduction):
Fed tax $19k
CA tax $7k

Selling rental:
Fed tax $78k
CA tax $37k

Your capital gains from the sale are $320k, making your AGI $470k. This triggers NIIT, plus you’ll have depreciation recapture. You’re paying a total of $89k in taxes on the gain, effectively 28% of it.

There are plenty of tax benefits for landlords along the way, so you could say you’ve been paying artificially low taxes for years, but the tax man does find a way to collect.

Remodeling is a capital expenditure that gets its own entry in your depreciation report (form 4562). You deduct a portion each year, then the total depreciation is recaptured at sale. The software calculates the total prior allowable depreciation.

Yikes, that's more than I'm calculating.
I'm still reading the IRS code on this stuff but I'll be somewhere between what you propose and what I propose.



Thank you for taking the time to run the numbers.
Now I have something I can compare my results against.

 

[cathy63]

As I understand it the IRS looks at the "basis for depreciation" of the unit, this does not include the land. As I mentioned that amount is 78K.

...

One issue is I don't understand how earlier items that were depreciated but not completely, get changed to capital costs.

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.

 

[wildsun]

Why not do a DST....

Finally decided to sell the rental, to much state and government interference.
Will be getting out of the rental business for good.


I know that I need to use a tax preparer this year but wanted to query the forum for their input. Maybe possible issues I'm not accounting for.

So, what can I expect to pay in federal and California taxes?
Some numbers....
Selling price 400K
Fees 20K

Capital improvements 30K (remodel in July 2021)
Depreciation 33K
Basis for depreciation 78K

Income 150K , filing married.

My estimates show about 40K in state tax and 50k in federal , OUCH .

Also, I had a question about depreciation on capital improvements prior to July 2021. If I spent 10k on exterior remodeling in 2013 how do I figure the capital costs as some of it has depreciated?

A little ranting if you please.
For the mom and pop landlords (1 or 2 properties) I was floored at how the government and state taxes the money. These folks are using the funds for retirement in most cases. California simply calls the money normal income, so we get kicked up to almost the highest tax bracket. For the government we get to pay and extra 3.8% for Net Investment Income Tax .

What a bunch of crap .

I could also go on about the Governments taxing and overreaching powers but I'll just drop it .
When I continuously here of free school lunches, free junior college, free health coverage, free basic income .... I get irritated that people believe it's actually free.

The middle and upper income classes are paying for it! Oops, I guess I hadn't finish my rant .


Thanks in advance to anyone willing to run the numbers and offer advice.

I'll have the same problems of sheltering taxes from sale of rental properties, but probably not for another decade. There's a type of investment called a DST (Delaware Statutory Trust) that you can do a 1031 exchange under, putting your money back into real estate, but the DST manages the real estate so you don't have the frustrations of landlording, and the 1031 exchange is a tax shelter so there are no taxes.

Sounds too good to be true, but its a thing. Returns are good and if the DST sells the building(s) you are invested in at a profit, you get a share of the profits too. The types of building DST investment in can be any type of building, but typically is apartment complexes, retail stores, office complexes, etc.

Essentially you are pooling your money via the DST with other landlords that don't want the hassle of landlording.

Read about it and see if its a fit. Here's a good summary:
https://www.madronafinancial.com/about-1031/

 

[stephenson]

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.

 

[Joylush]

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.

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.

 

[stephenson]

So, Joylush, I must be missing something.

Help me?

 

[Sunset]

Unfortunately, a few years ago I realized being a landlord was a bad retirement idea, mainly because the only way to correct my investment mistake is to die to get the stepped up basis.

A rental becomes a problem when selling, the entire thing is sold in 1 year, and spikes the income up a lot.
Compare that to $400K in stock or an IRA. Most folks sell off the stock spread over X years, nobody thinks it's smart to cash out an IRA all at one time.

 

[Scuba]

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.

I agree 100%.

 

[lordjust]

I agree 100%.

+1

And yes selling a rental is rough ... especially if you have owned it for a long time. I read about the DST before I sold mine and it seemed like a difficult option with limited numbers of people who have attempted it. I would love to hear if someone went through the motions.

 

[Amethyst]

We bit the bullet and sold our two rentals a few years ago. Landlording went downhill as a sideline - it seems far more of a hassle now than it did 20-30 years ago, and not merely because we are older. I'm just glad we didn't get caught up in the current no rent/no evictions mess.

Even though we didn't get much appreciation (our real estate timing is always terrible), depreciation recapture bit us hard. If the predicted tsunami of small-landlord sales materializes, it ought to be a bonus for federal and state treasuries.

 

[Philliefan33]

DH and I sold our rental in October 2020. The resulting proceeds more than doubled our income and we paid a lot of taxes. I never even knew about NIIT but we learned since we had to pay it. The income will put us into a higher IRMMA tier for DH’s Medicare next year.

But we still made money. We made steady money for 28 years and a windfall when we sold. We knew the tax advantages of a 1031 exchange, but didn’t want to be bothered being a landlord anymore. So we just paid the taxes and simplified our life.

 

[pb4uski]

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.

I thought this thread was about taxes on the sale of a rental property.

If you're talking about the eviction moratorium, then I somewhat agree... but the bigger problem there wasn't necessarily the idea but that the government didn't get $$$ into tenant and landlords hands quickly enough and it squeezed landlords because they still had to make their mortgage and property tax payments and other expenses.

 

[pb4uski]

.... A little ranting if you please.
For the mom and pop landlords (1 or 2 properties) I was floored at how the government and state taxes the money. These folks are using the funds for retirement in most cases. California simply calls the money normal income, so we get kicked up to almost the highest tax bracket. For the government we get to pay and extra 3.8% for Net Investment Income Tax .

What a bunch of crap .

I could also go on about the Governments taxing and overreaching powers but I'll just drop it .
When I continuously here of free school lunches, free junior college, free health coverage, free basic income .... I get irritated that people believe it's actually free.

The middle and upper income classes are paying for it! Oops, I guess I hadn't finish my rant .


Thanks in advance to anyone willing to run the numbers and offer advice.

Well, it would be pretty foolish to expect the lower income classes are paying for it.... they don't have any money to pay for it.

At the end of the day, tax on the sale of a rental are not much different than if you had invested the same amount into stock and it appreciated greatly and you sold it all in one fell swoop. While its true that depreciation recapture is taxed at 25%, it just effectively claws back the depreciation tax benefit that you received over they years but in a broadbrush way.... at the end of they day you don't pay any tax on that part of the gain.

The main problem is because rentals are an all or none type of thing you get all the gain at once and it can propel you into higher capital gain tax brackets, NITT, IRMAA, etc. If you had stock with a similiar sized gain you could sell it piecemeal and manage your tax costs better.

You made a lot of money, even after paying the taxes... so suck it up buttercup.

 

[Joylush]

I thought this thread was about taxes on the sale of a rental property.

If you're talking about the eviction moratorium, then I somewhat agree... but the bigger problem there wasn't necessarily the idea but that the government didn't get $$$ into tenant and landlords hands quickly enough and it squeezed landlords because they still had to make their mortgage and property tax payments.

OP is selling due to government overreach. My comment was to the reply suggesting they didn’t 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. I’ve done this several times and so so far so good.

 

[pb4uski]

OP is selling due to government overreach. My comment was to the reply suggesting they didn’t 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. I’ve 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.

 

[workmyfingerstothebone]

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.

 

[workmyfingerstothebone]

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 .....

 

[workmyfingerstothebone]

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.

Thanks for answering the post.


See my post for this reply...

https://www.early-retirement.org/fo...hat-taxes-to-expect-110438-2.html#post2648017

 

[workmyfingerstothebone]

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.

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


https://www.early-retirement.org/fo...hat-taxes-to-expect-110438-2.html#post2648017