It's time to put this topic to rest!

[Wilder Fuentes]

Howdy BP Community,

This question has been circling in my mind, and it's time to get answers.

I recently read an article in a professional publication for realtors that indicated that when one sells a secondary home, the owner will be hit with a tax bill on the profit of the sell. In his case, what is considered profit?

1) The difference between the original purchase price and the sell price? OR

2) The equity in the house + any amount over market value?

Essentially, I am curious to find out if my downpayment, which truly appears as if I have equity in the house, will in turn be taxed upon resell. That would be tragic!

I can't wait to read all the response from experts like YOU!

Thank you for sharing your knowledge and expertise.

[Will Fraser]

Hey @Wilder Fuentes,

You're overthinking it here, and this is quite common.

HOW you purchase something is largely irrelevant in this determination (i.e. a $100k home is $100k whether you purchase it all cash or using leverage).

We'll use nice round numbers here.

If you sold the home for $200k and had 8% costs of sale (agent commissions, title fees, HOA transfer fees, etc) then your net from sale would be $184,000

If you bought this home for $100k and had $2k in costs of sale here, then your basis for the property is $102k.  

So, you netted $184k from the sale and your basis is $102k, thus your rough taxable proceeds are $82,000.

The sticky wicket here comes when the home has been depreciated.  Let's say you've depreciated 50% of the home (i.e. you've owned it about 13.5 years and you've taken the depreciation loss each year).  Now your basis in the home is somewhere around $50k and when you go to sell the equation looks like this:

$184k - $50k = $134k of potential taxable profits

Thus the usefulness of the 1031 exchange!