Real Estate Property Analysis Question Related to Taxes

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Real Estate Property Analysis Question Related to Taxes

Justin Greenwood
Delmar, NY · Member since 2016 · 9 posts · 7 votes

Hello Biggerpockets community!

I'm a new investor. I bought Frank Gallinelli's "Mastering Real Estate Investment: Examples, Metrics and Case Studies" to practice analyzing property data to determine if a product was a good investment. In his Apartment Complex case study (Chapter 40), Mr. Gallinelli's numbers for the AFTER-TAX SALE PROCEEDS gave me some problems. First, I will show you the numbers for 2014, 2015, and 2016:

                                                       2014             2015                2016

PROJECTED SELLING PRICE        2,712,000       2,736,000       2,760,000

- Costs of Sale                                  189,840         191,520           193,000

- 1st Mortgage Payoff                 2,050,042        2,002,102       1,955,413

- 2nd Mortgage Payoff                   280,102          259,410           237,552

BEFORE-TAX SALE PROCEEDS       192,016          282,968           373,835

-Total Federal Tax on Sale                (9,905)             (9,344)             (8,819)

AFTER-TAX SALE PROCEEDS          202,921           292,312           382,654

I understand how all these numbers were calculated, with the exception of the "Total Federal Tax on Sale". How can I determine the Total Federal Tax on Sale given these numbers? Is there a standard rate of tax?

Thank you for your time,

Justin Greenwood

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Justin Greenwood I would think he is referring to capital gains tax on the sale. I am not sure what the long term capital gains rate is but It is certainly easy to google. (I think 12 or 15% and a higher rate on depreciation recapture)

    I struggled because the tax number just didn't seem to be in the correct range compared to the Before tax sale proceeds. BUT I realized that is not the number that is taxed. The capital gain is taxed not the sales proceeds. In the chart above he does not list the amount of capital gain.  Look for more information in the case study on what the capital gain is.

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  • Justin Greenwood
    OP
    Delmar, NY · Member since 2016 · 9 posts · 7 votes
    7y

    Thank you for the quick response. I've read, and reread the case study several times hoping to find something I'm missing that will help this make sense to me. I'll go back and review the details again and try to reverse engineer how he came up with those numbers. Perhaps the answer can be found in determining the capital gain, as you suggested.

    I really appreciate that you took the time to answer my question. I've actually been losing sleep over this!

    Justin Greenwood

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Justin Greenwood

    Everyone's tax situation is different so someone else's tax has little bearing on your situation if you sold something similar.

    In a short summary regarding capital gains on sale of an investment property
    Capital gains tax rates are either 0%, 15% or 20% depending on the tax bracket that you are in
    Net Investment Income Tax(NIIT) is an additional 3.8% if you are in the top bracket
    Depreciation recapture is capped at a maximum tax rate of 25%
    State Income Taxes - Dependent on the state that the property is located and the state that you live in.

    [email protected]917-280-8544
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