Lower taxes to the max when selling...depreciation

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Lower taxes to the max when selling...depreciation

Joe Szymczyk
va beach, VA · Member since 2018 · 66 posts · 4 votes

Hello

Looking at personal house and rentals and depreciation...

I havent sold yet....I have a few rentals that I have been holding....when it comes to sell...how are you guys lowering taxes to the max?

On depreciation...let's say you depreciated a house for 10 years or 27 years...streightline...and you go to sell. How does one get hit by taxes by IRS on this?

If house sells for 300,000 dollars...depreciated on original value bought let's say 100000 dollars...at 27 years....so on year 30....all depreciation is used up...and one sells for 300k....how would the numbers look?

300k minus 100k. Equals 200k in profit....so taxes would be paid on this....then how would depreciation work onthis number?  Maintenance and repairs over 30 years. Do those subtract?  Advertising..property management fees subtract?....

Would like to figure out how to best keep what records I need to help me retain most of that 200k from all the taxes. ....

Can anyone assist?

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y

@Joe Szymczyk in your example you're going to pay tax on all $300K.  Taxes are figured as follows;

Your starting basis (100K) + whatever improvements you made (we don't know these) - depreciation taken or that could have been taken (100k) = your adjusted cost basis (0).

You subtract your adjusted cost basis from the net sales price (300 - 0) and that is your gain.  Your gain is made up of two components - the depreciation recapture - $100K and the capital gain - $200K.   

Tax on the gain would be at 15% fed and whatever VA wants (could be up to 5.75%).

Tax on the depreciation would be at 25%.

The ability to use the deferred tax is huge both as a portfolio builder and a cash flow generator.  In your case you have the option of either paying around $65K to the govt or investing that $65K as part of a 1031 and generating income off that for your benefit.  If you can get 10% return on something that means that just the deferred tax is generating $6,500/year for your benefit all by itself.  Heck that's at least 6 months in Thailand and maybe a year in Guatemala.  And that's why the 1031 is such a key tax mitigating strategy.

If you have several rentals then the idea that keeps the tax dollars working for you is to consolidate those rentals into passive cash producing assets and live off that cash.  Your principle is secure and cash flow continues.  Come home for Christmas once a year.  

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  • Dan Moore
    Raleigh, NC · Member since 2019 · 78 posts · 40 votes
    7y

    Can't answer all the questions, but maintenance would be expensed in the year it was performed. Repairs could be amortized or expensed in the current year, just depends on what it was, and how aggressive the accountant wants to be trying to write things down. Since you are asking, I'm assuming you don't have an accountant looking at this. That would be my suggestion for money well spent.  

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  • Joe Szymczyk
    OP
    va beach, VA · Member since 2018 · 66 posts · 4 votes
    7y

    Thanks Dan....yes I am trying to figure out what the options are when selling...to lower taxes...seems the depreciation is some how brought back for calculating taxes

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    7y

    @Joe Szymczyk

    Hey joe. You’d owe capital gains taxes on the $200k and then you’d owe a 25% tax on the depreciation recapture. (If you’re saying the house cost $100k you would have only depreciated the building, say about 80% of the $100k. If you’re saying you paid $125k for the building and the land it’s on then you would have depreciated $100k. 

    So you either owe $20k or $25k in taxes for the depreciation recapture plus a capital gains tax on the $200k. The tax rate on which I believe changes depending on your total taxable income. 

    0Reply
  • Joe Szymczyk
    OP
    va beach, VA · Member since 2018 · 66 posts · 4 votes
    7y

    Bill wow...20k tax on depreciation...at 22percent rate 44k tax on 200k......64k in taxes.....wow...IRS will crush me...

    0Reply
  • Domenick T.
    Investor · Springfield , NJ · Member since 2017 · 192 posts · 93 votes
    7y

    @Joe Sz

    That’s why 1031 exchanges are popular. It’s either that or you can die and give the properties to your heirs with a stepped up cost basis. Either way works but there are pros and cons of each.

    0Reply
  • Joe Szymczyk
    OP
    va beach, VA · Member since 2018 · 66 posts · 4 votes
    7y

    Domenick...yes...but I was just looking to liquidate...and use the money to travel the planet....

    Sounds to me like it's better to keep the property to the point where...let's say market doubled the value....10 years....or when value is just higher...sell..then you dont have to worry about such a big hit from the depreciation...

    This maybe a better way....anyone with ideas on something like this?

    0Reply
  • Domenick T.
    Investor · Springfield , NJ · Member since 2017 · 192 posts · 93 votes
    7y

    @Joe Sz

    What about a cash out refi? If you have enough equity you can keep the property and use the equity to finance your trips. Just don’t refi so much that it’s cash flow negative.

    0Reply
  • Joe Szymczyk
    OP
    va beach, VA · Member since 2018 · 66 posts · 4 votes
    7y

    Domenick....right..now...just makes mortgage and repairs...would go negative..

    Back to the numbers...64k in taxes....plus closing costs and realtor...that's 30kish....

    So 94k minus 200k...that gets me profit of 106k plus any principle the renters paid....so could be 100k....thats 200k...in 30 years...assuming I put very low down...on original loan..

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    7y

    @Joe Szymczyk

    Joe, if your only going to walk with $106k, consider your current rental income as the return on $106k. If you’re getting over $1,000/mo rent you’re making 12%, not too shabby. Travel on that income  

    The alternative would be to do the 1031 exchange in to twice the price property with twice the income, using you’re current property as a 50% downpayment. The new property should cash flow with 50% down and now you can start depreciating the new purchase. 

    0Reply
  • Karen F.
    Investor · San Diego, CA · Member since 2015 · 435 posts · 421 votes
    7y

    We recently ran into this issue.  That's why we did a 1031 exchange.  We didn't want to pay the depreciation recapture tax.

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y

    Also look into 

    Monetized installment sales 

    Owner financing helps spread the gain over several years, and especially if you're just traveling and keeping your income low, you'll be in a lower tax bracket so you can really help reduce those gains. 

    Talk to your tax pro

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
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  • Joe Szymczyk
    OP
    va beach, VA · Member since 2018 · 66 posts · 4 votes
    7y

    Bill, Karen....so I would 1031...then I can sell 2 years later...and only pay tax on gain? And only 2 years of depreciation recapture? 

    Natalie...I do not like to seller finance...seen this done....and the person struggled to get paid...later...

    0Reply
  • Account Closed
    Attorney · Fort Lauderdale, FL · Member since 2019 · 8 posts · 4 votes
    7y

    @Joe Szymczyk have you ever heard of Delaware Statutory Trust (DST)? This strategy uses the 1031 exchange code and allows you to reinvest your investment into professionally managed portfolios, diversified across asset class and geographic, stay invested and earn passive income you don't have to manage.

    I am not a tax professional (disclaimer), but you're not going to be able to just forego paying taxes, rather differ them using the 1031 exchange or as Natalie mentioned using installment sale.

    Best of luck.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Joe Szymczyk in your example you're going to pay tax on all $300K.  Taxes are figured as follows;

    Your starting basis (100K) + whatever improvements you made (we don't know these) - depreciation taken or that could have been taken (100k) = your adjusted cost basis (0).

    You subtract your adjusted cost basis from the net sales price (300 - 0) and that is your gain.  Your gain is made up of two components - the depreciation recapture - $100K and the capital gain - $200K.   

    Tax on the gain would be at 15% fed and whatever VA wants (could be up to 5.75%).

    Tax on the depreciation would be at 25%.

    The ability to use the deferred tax is huge both as a portfolio builder and a cash flow generator.  In your case you have the option of either paying around $65K to the govt or investing that $65K as part of a 1031 and generating income off that for your benefit.  If you can get 10% return on something that means that just the deferred tax is generating $6,500/year for your benefit all by itself.  Heck that's at least 6 months in Thailand and maybe a year in Guatemala.  And that's why the 1031 is such a key tax mitigating strategy.

    If you have several rentals then the idea that keeps the tax dollars working for you is to consolidate those rentals into passive cash producing assets and live off that cash.  Your principle is secure and cash flow continues.  Come home for Christmas once a year.  

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • Matthew Ryan
    Developer · San Francisco, CA · Member since 2015 · 103 posts · 47 votes
    7y

    @Joe Szymczyk - If you're considering 1031, I'd also recommend looking at Opportunity Zones. I had a similar gain to yours and if you can position yourself into another cash flowing asset, it ALWAYS makes more sense to recognize the gain. Sitting on the equity is simply looking at money on paper. It can be extremely difficult to find an asset now but investing passively with a syndicator or fund may be of interest to you. You can DM for details on OZ's; we have a full white paper on the subject. Best of luck

    1Reply
  • Joe Szymczyk
    OP
    va beach, VA · Member since 2018 · 66 posts · 4 votes
    7y

    @Dave foster....I was looking...into getting rid of the real estate and putting the money into s p 500 index fund.. or another fund.any other suggestions how to do this while reducing taxes?

    @Mathew ryan...on this "It can be extremely difficult to find an asset now but investing passively with a syndicator or fund may be of interest to you. You can DM for details on OZ's; we have a full white paper.......what's DM? What's OZ?  What's a fund syndicator?.

    ....I like to sell one rental and use proceeds to buy into stock investments...eventually ..over time..get out of the real estate .

    0Reply
  • Tanner Crawley
    Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes
    7y

    @Joe Szymczyk Hey Joe. You should look into Opportunity Zones. You can defer capital gains until 2026, and it reduces your taxes owed by 15%. You are also exempt from taxes going forward. You would only need to reinvest the actual capital gains portions and you could still liquidate the cost basis.

    0Reply
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