Check my numbers, thinking of eating the tax

Tax, SDIRAs & Cost Segregation
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Check my numbers, thinking of eating the tax

Jack B.
Rental Property Investor 路 Seattle, WA 路 Member since 2014 路 1k+ posts 路 1k+ votes

Lived in it from2013 to 2015, then rented it out until 2018 at which point I moved back in for 2 years. Total time rented, about 4 years, total time lived in, about 4 years.

Bought 145K plus 5K closing costs, sold 416K.

Put new roof and water heater on for 14K to adjust my basis

25K selling costs.

10K depreciation.

By my calculations I have 217K that I divide by .5 to get 108.5 that I owe capital gains and depreciation recapture on, correct?

(145+5-10+14=154K) then (416-25-154 = 217) then 217/2 = 108.5

I make 308K a year W2 income. I'm expecting to pay 23% capital gains with the Obama care surcharge. Worth it or not? After 10 years of being a landlord of multiple properties, I've considered getting rid of them starting with this one rather than 1031 exchanging anymore. The have nots want what we worked for, cancel rent, live for free, but landlord you must pay and fix things in this 800K house you provide me for free....

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent 路 Houston, TX 路 Member since 2014 路 5k+ posts 路 6k+ votes
5y

@Jack B.

Your math is basically correct. The rate is closer to 24 % (23.8%), and depreciation recapture will be at 25% but it does not change the result materially. You divided it in half due to 4 out of 8 years non-qualified use (kudos for knowing how it works!) however depending on the exact dates it will not be equal to 50%. Other than that, you're on the right track.

Your question on whether it's worth it is both unclear and, IMHO, misguided. Worth it, as compared to what exact alternative? Keep it as rental? Continue living in it as your residence? Doing a 1031 exchange? Implementing some other deferred tax strategy?

You also need to take into consideration various other dominoes that may fall when you sell this one. The biggest one is potential suspended losses from this or other properties. If you have them, they will be released against this sale's taxable income. It can swing the result big time. There're possibly other moving parts on your tax return that would be affected by the sale.

The main reason I'm not a fan of your question is because it puts taxes at the center of a business decision process. When you decide what to do with your property, you need to take a holistic look, not just the amount of taxes. Consider your overall financial situation, your investments, your goals and future plans etc.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent 路 Houston, TX 路 Member since 2014 路 5k+ posts 路 6k+ votes
    5y

    @Jack B.

    Your math is basically correct. The rate is closer to 24 % (23.8%), and depreciation recapture will be at 25% but it does not change the result materially. You divided it in half due to 4 out of 8 years non-qualified use (kudos for knowing how it works!) however depending on the exact dates it will not be equal to 50%. Other than that, you're on the right track.

    Your question on whether it's worth it is both unclear and, IMHO, misguided. Worth it, as compared to what exact alternative? Keep it as rental? Continue living in it as your residence? Doing a 1031 exchange? Implementing some other deferred tax strategy?

    You also need to take into consideration various other dominoes that may fall when you sell this one. The biggest one is potential suspended losses from this or other properties. If you have them, they will be released against this sale's taxable income. It can swing the result big time. There're possibly other moving parts on your tax return that would be affected by the sale.

    The main reason I'm not a fan of your question is because it puts taxes at the center of a business decision process. When you decide what to do with your property, you need to take a holistic look, not just the amount of taxes. Consider your overall financial situation, your investments, your goals and future plans etc.

    1Reply
  • Jack B.
    OP
    Rental Property Investor 路 Seattle, WA 路 Member since 2014 路 1k+ posts 路 1k+ votes
    5y

    Bump

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  • Jim K.
    Rental Property Investor 路 Charlotte, NC 路 Member since 2017 路 271 posts 路 259 votes
    5y

    Hi Jack. Michael's response is spot on for your taxes. Are you looking for advice on whether to 1031 into another rental vs alternatives? 

    Obviously the market is hot right now so finding a decent deal to 1031 into is difficult. 

    1Reply
  • Sean RossPro Member
    1031 Exchange Qualified Intermediary 路 Denver, CO 路 Member since 2017 路 176 posts 路 97 votes
    5y

    @Jack B., I think @Michael Plaks hit the mark perfectly when he asked "Worth it compared to what?"

    Nobody in this industry wants to see you pay the IRS a big sum of money, but I think it would be a lot easier to give advice on potentially better options if you could elaborate on what's most important for you. Tax efficiency? Liquidity? Deleveraging? Income? Diversity of investments? Something more aesthetic?

    [email protected]888-899-1031
    1Reply
  • Michael Plante
    Deland, FL 路 Member since 2017 路 2k+ posts 路 1k+ votes
    5y
    Originally posted by @Jack B.:

    Lived in it from2013 to 2015, then rented it out until 2018 at which point I moved back in for 2 years. Total time rented, about 4 years, total time lived in, about 4 years.

    Bought 145K plus 5K closing costs, sold 416K.

    Put new roof and water heater on for 14K to adjust my basis

    25K selling costs.

    10K depreciation.

    By my calculations I have 217K that I divide by .5 to get 108.5 that I owe capital gains and depreciation recapture on, correct?

    (145+5-10+14=154K) then (416-25-154 = 217) then 217/2 = 108.5

    I make 308K a year W2 income. I'm expecting to pay 23% capital gains with the Obama care surcharge. Worth it or not? After 10 years of being a landlord of multiple properties, I've considered getting rid of them starting with this one rather than 1031 exchanging anymore. The have nots want what we worked for, cancel rent, live for free, but landlord you must pay and fix things in this 800K house you provide me for free....

     Understood almost nothing of this 

    Thing that stands out is over 300k/year income from a job.  馃槼 


    congrats 

    0Reply
  • Jack B.
    OP
    Rental Property Investor 路 Seattle, WA 路 Member since 2014 路 1k+ posts 路 1k+ votes
    5y
    Originally posted by @Sean Ross:

    @Jack B., I think @Michael Plaks hit the mark perfectly when he asked "Worth it compared to what?"

    Nobody in this industry wants to see you pay the IRS a big sum of money, but I think it would be a lot easier to give advice on potentially better options if you could elaborate on what's most important for you. Tax efficiency? Liquidity? Deleveraging? Income? Diversity of investments? Something more aesthetic?

    Goal 1 is to avoid paying IRS

    Goal 2 is to keep growing that money via leveraged real estate. Ideally close to me so I can manage like I do with my other properties. 

    Right now it looks like I'll have to buy in Florida (want to move there anyways in a year or 3 so might as well begin moving stuff there). I can find deals in FL. Even 2 hours south of Seattle, not so much.

    But Tampa and Orlando have all kinds of deals.

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  • Tyler GibsonBusiness Member
    Real Estate Agent 路 Orlando, FL 路 Member since 2017 路 1k+ posts 路 2k+ votes
    5y

    @Jack B. Come on man the weather is great and no state income tax. Oh did I mention that Florida is landlord-friendly? 

    [email protected]407-590-9858
    GPG Team 598 Reviews
    WebsiteView Page
    1Reply
  • Jim K.
    Rental Property Investor 路 Charlotte, NC 路 Member since 2017 路 271 posts 路 259 votes
    5y
    Originally posted by @Jack B.:
    Originally posted by @Sean Ross:

    @Jack B., I think @Michael Plaks hit the mark perfectly when he asked "Worth it compared to what?"

    Nobody in this industry wants to see you pay the IRS a big sum of money, but I think it would be a lot easier to give advice on potentially better options if you could elaborate on what's most important for you. Tax efficiency? Liquidity? Deleveraging? Income? Diversity of investments? Something more aesthetic?

    Goal 1 is to avoid paying IRS

    Goal 2 is to keep growing that money via leveraged real estate. Ideally close to me so I can manage like I do with my other properties. 

    Right now it looks like I'll have to buy in Florida (want to move there anyways in a year or 3 so might as well begin moving stuff there). I can find deals in FL. Even 2 hours south of Seattle, not so much.

    But Tampa and Orlando have all kinds of deals.

    That's helpful to understand. If you can find an asset or multiple that you are comfortable with, by all means, 1031 into them. Since you're coming from Seattle, you will find deals with better cash flow metrics in those markets. 


    Having said that, don't sell a good asset and buy a bad asset just to avoid paying taxes. If you can't find something that meets your criteria, it's often better to just pay the taxes. 

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent 路 Houston, TX 路 Member since 2014 路 5k+ posts 路 6k+ votes
    5y
    Originally posted by @Jim K.:

    I love this advice ^^ 

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