All Forum Posts by: Account Closed

There is no 15.3% SE tax on Short Term Capital Gains.  Again, we are mixing two categories.  Short Term Capital Gains is not the same as business income taxed at your personal tax rate.  The Short Term Capital Gains tax rate is the same as your personal tax rate, but it is not SE income, and there is no 15.3% SE tax, it is still Short Term Capital Gains.

And there is no getting out of it, this is what it is.  The IRS is not the one to decide if you are a Real Estate Professional and are operating a business with an inventory of houses.  The Taxpayer is the one who makes this decision.  We have a self-reporting tax system.  Buying and selling one or two houses a year, maybe even three, does not make you a dealer (unless you want to claim that you are in order to claim losses).  You will either pay STCG or LTCG.

But if you want to pay the highest tax possible, go ahead.  It is just not necessary.

If you bought one property, rehabbed it, and then sold it, you are not a "flipper."  You are just a taxpayer who bought a capital asset and then sold it.  You are subject to capital gains tax.  If you held it for one year or less, you will be taxed on the Short Term Capital Gains, which will be at your ordinary income level.  If you held the property for a year and a day, you will be taxed on the Long Term Capital Gains, at the rate applicable for your tax bracket.  You indicated that it is 15%.  And yes, your tax bracket is determined by the total amount of your taxable income, although part of it will be taxed an one rate, and part of it at another.

There is a lot of talk on the Forum about "intent" and in some cases that is important, but not here.  Your intent when you buy a property is irrelevant (unless it is a Replacement Property in a Section 1031 Exchange, or you are trying to qualify to be treated as a Real Estate Professional by the IRS).  The facts of the transaction are what you report, and the amount of the profit and the time that you held the capital asset are all that matter.

Whatever you say, J.  I am a former Tax Examiner for the IRS, a former Tax Accountant for a Big Eight Accounting Firm, and a Real Estate and Tax Attorney for 34 years.  I have done thousands of personal, corporate, and partnership tax returns, mostly for people involved in real estate activities, including myself.  But I'm sure you wouldn't be correcting people if you didn't know what you were talking about.  Thank you.

If you owned the property for at least a year and a day, and you sell it, your capital gains is classified as Long Term Capital Gains.  The 24% tax rate that you mention is probably a rounding-up of  23.8%.  That figure is probably a combination of two taxes that are assessed when an asset is sold that triggers the LTCG tax.  The first figure is 20%, which is the maximum LTCG tax rate, and the second figure is 3.8%, which is the tax referred to as the "investment tax" or the "Obamacare tax."  But the 20% only applies to Married Taxpayers with Taxable Income of $464,851 or more.  Those in lower Marginal Tax Brackets will pay 15%, or even 0%.

And, by the way, yes you will pay the 9% state tax on the LTCG in the year of sale, but the following year that tax can be deducted on your Schedule A Itemized Deductions and, provided your total Schedule A Adjustments are above the Standard Deduction amount, you will get the benefit of that 9% back as a deduction from Income (not a reduction in taxes, but a deduction from Taxable Income).

I hope this helps.  If you have a follow-up let me know.

Michael Lantrip

If the parents never lived in the property and never did anything to show that it was their primary residence, such as using the address on their driver's license, etc., then it is not their primary residence and the sale would not be covered by the tax exemption available under Section 121 Sale Of Primary Residence of the Internal Revenue Code.

If there was never a lease between the parents and the daughter, reflecting arms-length business negotiations and fair market terms and actual monthly payments, then the property in not "investment property" under Section 1031 Like Kind Exchange of the Internal Revenue Code.

If the property is sold now, it will be treated similarly to a vacation home, the profit will be subject to Long Term Capital Gains, probably at 15%, but it is impossible to speculate without looking at the parents' financials.

The parents can begin renting the property right now and after a period of time, preferable a year and a few months, the property could be sold and the tax on the capital gains deferred if all of the net sales proceeds are used to purchase a like kind Replacement Property.

If you go the rental route, sit down an work out a plan before you start.  There are a number of favorable options available, depending on the need/desire to hold cash, etc.

I hope this helps.  Let me know if you have a follow-up.

Michael Lantrip

I don't know about the FHA 90-day rule, but you might have a problem selling this property under the Section 1031 Like Kind Exchange rules. You have already entered into a contract to sell the property, and apparently you did this shortly after acquiring it. Therefore, the property was never investment real estate, but was "inventory" available for sale, and is not covered by the provisions of Section 1031.

Section 1031 is not a card you pull out and use, it is part of your overall wealth strategy, specifically deferring taxes on your capital gains, and it spans at least a two-year period, one year before you sell the Relinquished Property and one year after you acquire the Replacement Property while you are qualifying each as being held for investment.

I hope this helps.  Let me know if you have a follow-up.

Michael.

It doesn't look like you will have a Capital Gains problem, but just for the sake of clarity, go through the analysis.

What is your basis in the property?

First, your husband inherited 25% interest in the property, so his basis in that is the Fair Market Value of the property at the time of death.  If you have an appraisal within 30 days of death, use that.  If you do not, look at the property tax records (they are not usually accurate, but that's all you have).

Next, your husband purchased the remaining 75% of the property from the three relatives.  Add the amount he paid to the figure above, and you have your basis in the property.

Now, add to this figure the amount you spent in order to make the property qualify for sale, whether for repairs or for capital improvements.  This is the total of your basis in the property, plus repairs/improvements.

Subtract this number, plus the closing costs, from the amount you are selling the property for, and you will have your Capital Gains, if any.

I hope this helps.  Let me know if you have a follow-up.

"Maternity Leave" protection is probably one of the strongest federal laws in existence.  It trumps all other law, and it trumps reasonable behavior.  You don't ever want to use those words if you are in a decision-making position regarding the person.  I hope you don't get a letter about it, you seem like one of the good guys.  

For each property: what is your basis, how long have you owned it, what is it being used for, and why are you grouping them together in the question?

Thanks, Mike.  ("Audit" is a bi***, man.)  I don't know the rules here, either, but I assume they just require a level of professional behavior, and trying to be helpful, so I don't see how that would be frowned on.  I would be interested in hearing more about your operation and your experiences thus far, so I'll be in touch.  Michael.