How much should I set aside for capital gains?

Question

I currently own a duplex, incoming rent after management fees comes to $2256, mortgage is $1252. I obviously am setting a good portion of the cash flow aside for futureExpenses but how much should I be setting aside for capital gains? Is there a general rule of thumb?￼￼

Clint G. · Answer

After expense write offs and depreciation, you probably won't show any gains. Ah, the joy of real estate investing!

Ashish Acharya · Answer

Peter that is not correct.

Ryan, your rental income is reported on Sche E.  It is not a capital gain. It will be taxed as ordinary income. If you have a loss, it might be limited based on your income level.

When you sell it, the half of the gain not taxable under section 121. Make sure you talk to your advisor.

Account Closed · Answer

You should have enough deductions to show zero income from your duplex or at worst a very small amount of income.

Ryan Cleary · Answer

I’m sorry, I did not mean capital gains. I meant to ask if There was a general rule of thumb for taxes paid on cash flow￼￼￼

Wayne Brooks · Answer

Why set aside for capital gains?  You pay that when you sel

Do you mean for ordinary income tax based on cash flow profits?

David M. · Answer

@Ryan Cleary

Yes, you should/could run some quick numbers yourself assuming you have all your numbers handy.  Using SchE as a guide, take your rental income and subtract your expenses.  As mentioned, the big kicker is the depreciation.  Take the "improvement" portion of your purchase cost (usually you figure ratio from your assessed values to figure the improvement portion) and divide by 27.5.  That's the amount of depreciation deduction you take every year.

Unless you really have a superdupey perfoming rental, you should normally, at best, be in the break even ball park.  So, you really shouldn't have to worry about huge tax hit when it comes time to do your return.  If it winds up being an overall loss, you might be able to take the loss on your 1040 otherwise the losses are carried over, but thats a different discussion.  Google Passive Allowed Losses (PAL).

N.B.  There is no "free lunch" with the IRS.  When it comes time to sell, you pay taxes on what is called "unrecaptured depreciation" which is generally at 25%.  But, that's a whole nother semi-complicated discussion.

Good luck.

Basit Siddiqi · Answer

@Ryan ClearyYou are not necessarily taxed on "cash flow", you are taxed on taxable rental income.some differences between cash flow and taxable rental income.Principal payments lower cash flow but do not lower taxable incomeDepreciation does not lower cash flow but lowers taxable income

Regarding how much you should put away for taxes, the ideal situation is $0 but only your accountant can answer that.That is dependent on what federal and state tax rates you are in and what your net taxable rental income is.

Greg Murphy · Answer

@Ryan Cleary

Put up 30%

Greg Murphy · Answer

30%

Greg Murphy · Answer

@Ryan Cleary30%

How much should I set aside for capital gains?

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