I need to learn about capital gains taxes

2 Replies

Hubby and I are putting the finishing touches on our first investment purchase.  We bought it to be a rental.  However, we have learned from our realtor that we may be able to sell it for more than we realized.  Even so, it's a pittance compared to what many on here do, but it's pretty encouraging for us.

We purchased it for $63,500.  We have about $5k in materials and a whole lot of sweat!  Our realtor says it will sell for $85-88k.  We need to subtract 6% realtor fees and our $5k material cost.  That leaves us with a decent profit.

But, how do we know how much to set aside for capital gains taxes?  Will we be saying goodbye to our profit?

Btw, this home will rent for $800/month if we decide to hold it.  This is in Indianapolis. 

@Angela Smith If you have not held the property for a year then it is short term capital gains which is taxed as earned income, or ordinary income. You will only be taxed on the profit so no the tax will not wipe out your profit. If you are in a high tax bracket it can certainly reduce your profit significantly.

I am not an accountant and the new tax law has brought changes that I don't yet totally understand. I suggest you talk to a tax professional who is familiar with real estate.

@Angela Smith

If you hold the property - you are looking at approximately a 1% deal. $800 rents over $85,000 valued property. 
You should be seeing some cash-flow if its a 1% deal.

If you sell the property now - the gain isin't so great

Sales price $85,000
Less Commission of $4,000
Less Misc Closing costs $2,500
Less cost basis of $68,500
Gain = $10,000

You then have to pay federal income tax(STCG) which is your marginal tax rate.
You also have to pay income tax to Indiana of 3.3%

I don't know what your marginal tax rate is but you are giving up the cash-flow for maybe $8,000.

I would personally keep the property. 

There may also be temptations from the real estate agent to hint for you to sell as he gets a commission for doing so.
He is definitely not going to be biased.