Capital gains tax based on income?

14 Replies

I bought a condo in 2015 and lived in it for less than two years and then rented it out for a couple years. This was all before I found BP and knew anything about real estate investing. Once I joined the community and started looking into RE investing, I realized I had to sell it because it wasn't cash flowing and I was actually losing money. However, it did appreciate and I made some money on the deal. I didn't put it into a 1031 right away, and I don't know if I can still can (I sold it about 6 months ago), and I'm worried I'll be taxed for capital gains on it. However, I make less than $37k a year and from the research I've done, I fall into the 0% capital gains bracket because of that. 

Can anyone tell me if I am correct or is it more nuanced than that? I've thought about reaching out to a CPA, but if it's as simple as the research I've done makes it out to be, I don't want to waste the money. 

Thanks in advance for any advice!

Hi Matt,

I would probably look into getting a CPA. I don't think you will have much gain, but it might be good just to make sure it all gets reported correctly. Your basis would have increased to the fair market value of the property at the time that you started renting it, and you would also be able to include any selling costs to reduce your gain. You will have some depreciation recapture (whether you reported depreciation each year or not) and that will get taxed at your ordinary tax rate. If you weren't taking it, then there is a way to catch-up that depreciation, so they can offset.

The capital gain tax rate (if you have any gains) should be based on your taxable income, which is your income minus the standard deduction or itemized deductions whichever you do. But any gain and depreciation recapture do get added to your income in determining where you fall in the range. I think you'll still be ok, but based on the income amount you gave, it sounds like you are single and the 0% CG ends at $39,375 so you are kind of on the bubble.

If you do end up with some capital gains, it may end up being 15% if not 0%, but I'm not sure it would be worth doing a 1031 for little to no gain even at 15%, and you only have 6 months (180 days) to complete it so you are probably out of time anyway.

Hope this helps! If you need me to explain something more/different, just let me know.

@Matt Carozza , Your 1031 must be in place prior to the sale.  So once you closed on the sale without a 1031 intermediary in place you recognized the gain.  

If your income is less than level mentioned by @Josh Dixon  then the cap gains rate is 0.  But your sale could impact that taxable income.  So do check with a CPA so you have time to plan accordingly.

Originally posted by @Josh Dixon :

Hi Matt,

I would probably look into getting a CPA. I don't think you will have much gain, but it might be good just to make sure it all gets reported correctly. Your basis would have increased to the fair market value of the property at the time that you started renting it, and you would also be able to include any selling costs to reduce your gain. You will have some depreciation recapture (whether you reported depreciation each year or not) and that will get taxed at your ordinary tax rate. If you weren't taking it, then there is a way to catch-up that depreciation, so they can offset.

The capital gain tax rate (if you have any gains) should be based on your taxable income, which is your income minus the standard deduction or itemized deductions whichever you do. But any gain and depreciation recapture do get added to your income in determining where you fall in the range. I think you'll still be ok, but based on the income amount you gave, it sounds like you are single and the 0% CG ends at $39,375 so you are kind of on the bubble.

If you do end up with some capital gains, it may end up being 15% if not 0%, but I'm not sure it would be worth doing a 1031 for little to no gain even at 15%, and you only have 6 months (180 days) to complete it so you are probably out of time anyway.

Hope this helps! If you need me to explain something more/different, just let me know.

When you convert a primary residence to a rental it's basis is the LOWER of FMV at time of conversion or original purchase price.

So his basis would not have stepped up to FMV.

IRS Pub 551

Originally posted by @Matt Carozza :

I bought a condo in 2015 and lived in it for less than two years and then rented it out for a couple years. This was all before I found BP and knew anything about real estate investing. Once I joined the community and started looking into RE investing, I realized I had to sell it because it wasn't cash flowing and I was actually losing money. However, it did appreciate and I made some money on the deal. I didn't put it into a 1031 right away, and I don't know if I can still can (I sold it about 6 months ago), and I'm worried I'll be taxed for capital gains on it. However, I make less than $37k a year and from the research I've done, I fall into the 0% capital gains bracket because of that. 

Can anyone tell me if I am correct or is it more nuanced than that? I've thought about reaching out to a CPA, but if it's as simple as the research I've done makes it out to be, I don't want to waste the money. 

Thanks in advance for any advice!

 It's too late for a 1031. 

You mention you occupied it less than 2 years- and then rented for a few years. 

What is the actual timeline? And why did you move out? You still may qualify for  a partial 121 exclusion. 

If not, capital gains are based on your tax bracket but the GAIN goes into your income calculation. So your income is $35k now and 0%- but add in the $X  worth of gain and you're likely in the 15% bracket. 

Your gain will be based on sales price - selling expenses - adjusted basis. And any amount of the gain that was generated from depreciation will be taxed at your ordinary rate up to 25% 

I would reach out to a tax pro to make sure this is all being handled correctly on the sale.

I am a "recovering" CPA and Josh Dixon and Natalie Kolodij are right on.  You will need to claim the sale on your tax return however the gain would be taxed at 0% . I would highly recommend you work with a CPA.  Natalie Kolodij is very knowledgeable and an expert in RE

Originally posted by @Natalie Kolodij :
Originally posted by @Josh Dixon:

Hi Matt,

I would probably look into getting a CPA. I don't think you will have much gain, but it might be good just to make sure it all gets reported correctly. Your basis would have increased to the fair market value of the property at the time that you started renting it, and you would also be able to include any selling costs to reduce your gain. You will have some depreciation recapture (whether you reported depreciation each year or not) and that will get taxed at your ordinary tax rate. If you weren't taking it, then there is a way to catch-up that depreciation, so they can offset.

The capital gain tax rate (if you have any gains) should be based on your taxable income, which is your income minus the standard deduction or itemized deductions whichever you do. But any gain and depreciation recapture do get added to your income in determining where you fall in the range. I think you'll still be ok, but based on the income amount you gave, it sounds like you are single and the 0% CG ends at $39,375 so you are kind of on the bubble.

If you do end up with some capital gains, it may end up being 15% if not 0%, but I'm not sure it would be worth doing a 1031 for little to no gain even at 15%, and you only have 6 months (180 days) to complete it so you are probably out of time anyway.

Hope this helps! If you need me to explain something more/different, just let me know.

When you convert a primary residence to a rental it's basis is the LOWER of FMV at time of conversion or original purchase price.

So his basis would not have stepped up to FMV.

IRS Pub 551

Thank you Natalie for the reference, but I think you're just splitting hairs here. The FMV of the house would likely be lower than his adjusted basis after splitting out the value of the land, unless it increased a lot in the year and a half that it was a personal residence.

Pub. 551, pg 11:
"Your adjusted basis in the house when you
changed its use was $178,000 ($160,000 +
$20,000 − $2,000). On the same date, your
property had an FMV of $180,000, of which
$15,000 was for the land and $165,000 was for the house. The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it's less than your adjusted basis ($178,000)."

Originally posted by @Josh Dixon :
Originally posted by @Natalie Kolodij:
Originally posted by @Josh Dixon:

Hi Matt,

I would probably look into getting a CPA. I don't think you will have much gain, but it might be good just to make sure it all gets reported correctly. Your basis would have increased to the fair market value of the property at the time that you started renting it, and you would also be able to include any selling costs to reduce your gain. You will have some depreciation recapture (whether you reported depreciation each year or not) and that will get taxed at your ordinary tax rate. If you weren't taking it, then there is a way to catch-up that depreciation, so they can offset.

The capital gain tax rate (if you have any gains) should be based on your taxable income, which is your income minus the standard deduction or itemized deductions whichever you do. But any gain and depreciation recapture do get added to your income in determining where you fall in the range. I think you'll still be ok, but based on the income amount you gave, it sounds like you are single and the 0% CG ends at $39,375 so you are kind of on the bubble.

If you do end up with some capital gains, it may end up being 15% if not 0%, but I'm not sure it would be worth doing a 1031 for little to no gain even at 15%, and you only have 6 months (180 days) to complete it so you are probably out of time anyway.

Hope this helps! If you need me to explain something more/different, just let me know.

When you convert a primary residence to a rental it's basis is the LOWER of FMV at time of conversion or original purchase price.

So his basis would not have stepped up to FMV.

IRS Pub 551

Thank you Natalie for the reference, but I think you're just splitting hairs here. The FMV of the house would likely be lower than his adjusted basis after splitting out the value of the land, unless it increased a lot in the year and a half that it was a personal residence.

Pub. 551, pg 11:
"Your adjusted basis in the house when you
changed its use was $178,000 ($160,000 +
$20,000 − $2,000). On the same date, your
property had an FMV of $180,000, of which
$15,000 was for the land and $165,000 was for the house. The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it's less than your adjusted basis ($178,000)."

In this example it happens to be less. 


But if we take his house value when he bought it in 2015 (excluding land value separated out)

And look at the house value today it's FMV

What makes you think it was worth more several years ago in the current market?

You split out land at both points in time for the adjusted basis and the current FMV. Houses have gone up in value 99% of the time over the last several years.

And again, you said "your basis would have increased to the FMV". If the FMV today was higher- his original house basis is what would be used. Lower of the two.

Originally posted by @Josh Dixon :
Originally posted by @Natalie Kolodij:
Originally posted by @Josh Dixon:

Hi Matt,

I would probably look into getting a CPA. I don't think you will have much gain, but it might be good just to make sure it all gets reported correctly. Your basis would have increased to the fair market value of the property at the time that you started renting it, and you would also be able to include any selling costs to reduce your gain. You will have some depreciation recapture (whether you reported depreciation each year or not) and that will get taxed at your ordinary tax rate. If you weren't taking it, then there is a way to catch-up that depreciation, so they can offset.

The capital gain tax rate (if you have any gains) should be based on your taxable income, which is your income minus the standard deduction or itemized deductions whichever you do. But any gain and depreciation recapture do get added to your income in determining where you fall in the range. I think you'll still be ok, but based on the income amount you gave, it sounds like you are single and the 0% CG ends at $39,375 so you are kind of on the bubble.

If you do end up with some capital gains, it may end up being 15% if not 0%, but I'm not sure it would be worth doing a 1031 for little to no gain even at 15%, and you only have 6 months (180 days) to complete it so you are probably out of time anyway.

Hope this helps! If you need me to explain something more/different, just let me know.

When you convert a primary residence to a rental it's basis is the LOWER of FMV at time of conversion or original purchase price.

So his basis would not have stepped up to FMV.

IRS Pub 551

Thank you Natalie for the reference, but I think you're just splitting hairs here. The FMV of the house would likely be lower than his adjusted basis after splitting out the value of the land, unless it increased a lot in the year and a half that it was a personal residence.

Pub. 551, pg 11:
"Your adjusted basis in the house when you
changed its use was $178,000 ($160,000 +
$20,000 − $2,000). On the same date, your
property had an FMV of $180,000, of which
$15,000 was for the land and $165,000 was for the house. The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it's less than your adjusted basis ($178,000)."

Dude, Natalie is correct. It never increases to FMV except on date of death. It is possible it is lower due to FMV. You directly contradicted yourself.

Thank you Natalie and Steven for setting me straight, I havent done a rental conversion in a while and didnt look it up before commenting. I didnt realize this was a technical question, I thought he was asking whether to get a CPA or not. His post had sat for 5 hours with no comments and I thought I would make a suggestion for him to get some help (obviously not me).

Originally posted by @Josh Dixon :

Thank you Natalie and Steven for setting me straight, I havent done a rental conversion in a while and didnt look it up before commenting. I didnt realize this was a technical question, I thought he was asking whether to get a CPA or not. His post had sat for 5 hours with no comments and I thought I would make a suggestion for him to get some help (obviously not me).

You've just got to be careful on BP because people lookup questions related to REI tax stuff and find answers on here. If the answer is wrong then that info spreads.

That's happened with a few blogs/ posts/ ect over the years- Always better to provide a more general answer than go into details if it's not something you're 10000% sure on because people assume everything on the internet is fact. 

Thank you all for your replies and wealth of information @Josh Dixon , @Dave Foster , @Mark Creason , @Natalie Kolodij and everyone else. 

@Natalie, I bought it in October 2015 and lived there until June 2017, at which point I moved abroad for some time. I rented it from July 2017 until July 2018 and sold it in August 2018. I bought it for $119k and sold it for $159k, if that's useful information. 

After reading all of this information, I will definitely be reaching out to a tax pro in the area. If anyone has any recommendations for someone in the Richmond/Central Virginia area, I'd really appreciate it.

Originally posted by @Matt Carozza :

Thank you all for your replies and wealth of information @Josh Dixon , @Dave Foster , @Mark Creason , @Natalie Kolodij and everyone else. 

@Natalie, I bought it in October 2015 and lived there until June 2017, at which point I moved abroad for some time. I rented it from July 2017 until July 2018 and sold it in August 2018. I bought it for $119k and sold it for $159k, if that's useful information. 

After reading all of this information, I will definitely be reaching out to a tax pro in the area. If anyone has any recommendations for someone in the Richmond/Central Virginia area, I'd really appreciate it.

Why did you move overseas? Was it for work, a medical reason, any kind of unforeseen circumstances? 

 If so, you can qualify for a partial 121 exclusion which would result in everything except that 1 year of depr. recapture being tax free. 

Also though- If it was sold in 18 this should have all been reported on your 2018 taxes. 

I don't have a local referral but most of the REI specialized tax pros here on BP work remotely with clients all over the country.

@Natalie Kolodij , my apologies, Monday morning got the best of me. I sold it this August, not 2018.

I moved to Australia on a Working Holiday visa to work and travel. I'm not sure if that would qualify. 

And really? I'd love to chat more then. I'll send you a message when I get off work today if that's alright.