$40K tax bill seems off

18 Replies

I just got a draft from a CPA, that I need to write a check of $40K for taxes.

I have in my email where he said even if I don't do a 1031 exchange, my capital gains will be offset by passive carryforwards. I've had issues with this particular CPA taking 3-4 weeks to respond to emails and generally giving off the cuff, not researched, and flat out wrong tax planning advice.

Anyway, I had a partially failed exchange (Realty Doctors promised they have NEVER missed a clients exchange, and lo and behold their builder couldn't build the 2nd property in time).

My only gains are a $102K undeferred gain on the property I sold, and a single K-1 syndication exit where I invested $50K and got a $30K profit.

When I look at the draft return, my capital gains from the sale of my home are being added to my AGI and I'm having to pay ordinary income taxes on sale of a long term capital gains asset. That seems very off to me.

My question is, selling real estate assets that you've held for more than 1 year should result in a long term capital gains tax rate of 15%.

The math isn't adding up. Even if I had ZERO passive lose carryforwards, the tax bill cannot be $40K on a $100K gain on a property and a single syndication exit. And I definitely have had passive carryforwards.

Thoughts on this guys? I have also been looking for a new CPA for 2020 (extension was filed), so would love your thoughts and I think if a professional looks at this tax return draft they may find it's not correct.

You need to ask your cpa these questions. The total tax due also depends on your W2 income and other gains besides real estate,i.e the capital gains tax could be 20% and you may have dividend as well as capital gains from other assets. In 2018, I had sold a stock with 70k gains after holding it for a few years, and my total tax due was 26k. Of course, there were other factors causing the tax due to reach that number. My taxes were done by PwC with guaranteed compliance and no errors.

As for real estate, if the passive losses were previously used to offset passive gains, then on exit you will pay higher taxes (depreciation recapture is taxed at higher rate than long terms capital gains). This is the reason people do 1031X, because realizing the gains would mean paying more taxes than what was saved. Just remember that Uncle Sam is not your uncle - he is your daddy and he is going to win every time.

Originally posted by @Andrey Y. :

My question is, selling real estate assets that you've held for more than 1 year should result in a long term capital gains tax rate of 15%.

The math isn't adding up. Even if I had ZERO passive lose carryforwards, the tax bill cannot be $40K on a $100K gain on a property and a single syndication exit. And I definitely have had passive carryforwards.

Thoughts on this guys? I have also been looking for a new CPA for 2020 (extension was filed), so would love your thoughts and I think if a professional looks at this tax return draft they may find it's not correct.

How are you calculating those gain figures? Are you using proceeds less amount you put in or proceeds less adjusted basis after the accelerated losses from the first couple years?

At a very high level and without really knowing your situation, I can only guess that your tax liability is high because you might have used some of your PALs over the years. If you didn't touch any of your PALs, then I agree that the 40k amount does not seem right.

Originally posted by @Michael Plante :

Very confused what you actually have to declare


bottom line how much income from ALL sources for the year?

 Why is this relevant? If my top tax bracket is say 24%, then I am paying 24c on the last dollars of my W-2. However, disposal of a real estate asset should result in long term capital gains tax of 15%. So why is my day job income being lumped in with my passive and active real estate capital gain? That is what doesn't make sense.

Originally posted by @Andrey Y. :
Originally posted by @Michael Plante:

Very confused what you actually have to declare


bottom line how much income from ALL sources for the year?

 Why is this relevant? If my top tax bracket is say 24%, then I am paying 24c on the last dollars of my W-2. However, disposal of a real estate asset should result in long term capital gains tax of 15%. So why is my day job income being lumped in with my passive and active real estate capital gain? That is what doesn't make sense.

because it is relevent.

Long-term capital gains are not just taxed at 15%...they can be taxed at 0% or even 20%.
Furthermore, there is a potential 3.8% net investment income tax.
Furthermore, there is depreciation recapture which is taxed up to 25%

Talk to your CPA and have him explain the return to you where you have the opportunity to ask him these questions. 

Originally posted by @Andrey Y. :
Originally posted by @Michael Plante:

Very confused what you actually have to declare


bottom line how much income from ALL sources for the year?

 Why is this relevant? If my top tax bracket is say 24%, then I am paying 24c on the last dollars of my W-2. However, disposal of a real estate asset should result in long term capital gains tax of 15%. So why is my day job income being lumped in with my passive and active real estate capital gain? That is what doesn't make sense.

Because of what Basit said above  

@Andrey Y. just based on your comment about the CPA taking weeks to reply to an email, I recommend you looking at other options.  I would always recommend getting a CPA who is a specialist in the type of asset you’re investing in. I believe there are one or two CPAs in this thread so you may want to reach out to them. Feel free to PM me if you want to discuss this further. Good luck!

Originally posted by @Paul Moore :

@Andrey Y. just based on your comment about the CPA taking weeks to reply to an email, I recommend you looking at other options.  I would always recommend getting a CPA who is a specialist in the type of asset you’re investing in. I believe there are one or two CPAs in this thread so you may want to reach out to them. Feel free to PM me if you want to discuss this further. Good luck!

 By the way, for anyway who is paying attention. I was kinda criticized for not knowing what I am talking about, or being harsh to my CPA. Guess what!

Lo and behold, my CPA said "oops, I made a mistake, you don't owe $41K, actually you only owe $7K!" But wait, it gets better. Then two months later he told me "Andrey, you are actually getting back a $6K refund!" I swear, I couldn't make this stuff up if I tried. And I got my refund. Gotta love math and CPAs :)

Originally posted by @Basit Siddiqi :
Originally posted by @Andrey Y.:
Originally posted by @Michael Plante:

Very confused what you actually have to declare


bottom line how much income from ALL sources for the year?

 Why is this relevant? If my top tax bracket is say 24%, then I am paying 24c on the last dollars of my W-2. However, disposal of a real estate asset should result in long term capital gains tax of 15%. So why is my day job income being lumped in with my passive and active real estate capital gain? That is what doesn't make sense.

because it is relevent.

Long-term capital gains are not just taxed at 15%...they can be taxed at 0% or even 20%.
Furthermore, there is a potential 3.8% net investment income tax.
Furthermore, there is depreciation recapture which is taxed up to 25%

Talk to your CPA and have him explain the return to you where you have the opportunity to ask him these questions. 

 That I did. See above. Turns out instead of owing $41K, turn out, * poof *, I actually got BACK $6K. Needless to say, I was very happy to hear this.

You ere happy your cpa made a massive mistake? I bet he’s glad to hear this and will continue to provide you mistakes in the future to be happy about. 

glad things turned out this way but you need to have a CPA that explains things to you. Also like any other humans, CPA's make mistakes but they should always explain the ins and outs. 

@Andrey Y. To add on to what others have said, you should find a CPA who is willing to take the time to explain these things to you in a way that makes sense. This is YOUR tax return and YOUR finances, so you should understand them (at least to an extent). Yes, CPAs are human and make mistakes (many just rely on tax prep software to spit out an answer), but a good CPA will look for tax-saving opportunities and communicate with you on why/how to implement them.

Good on you for not accepting and paying something that didn't make sense, and for asking about it.

Originally posted by @Holly Chan :

@Andrey Y. To add on to what others have said, you should find a CPA who is willing to take the time to explain these things to you in a way that makes sense. This is YOUR tax return and YOUR finances, so you should understand them (at least to an extent). Yes, CPAs are human and make mistakes (many just rely on tax prep software to spit out an answer), but a good CPA will look for tax-saving opportunities and communicate with you on why/how to implement them.

Good on you for not accepting and paying something that didn't make sense, and for asking about it.

 I'm happy and eager for recommendations.

Originally posted by @Bill Brandt :

You ere happy your cpa made a massive mistake? I bet he’s glad to hear this and will continue to provide you mistakes in the future to be happy about. 

 Well of course I didn't want to have to be the one to have my radar go off that something isn't right, ideally it should be the CPA that would be astute enough to make that observation since it's them who are the real estate tax expert and actually preparing the tax return.