What to know? Preparing to sell rental property

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

What to know? Preparing to sell rental property

Post by uwbadgers »

We will be selling our rental property this Spring. This is our one and only rental as we "fell" into it about 7 years ago. Just ready to be done with it now as it is a condo and the HOA is working on phasing rentals our so going to get out now and enjoy the cash :)

Main questions surround anything I should be aware of/plan ahead for due to the sale and large cash proceeds.

Relevant info below.....please let me know if more is useful in this case.

And, if there is nothing "extra" to do, that works too. Just thought I'd get some thoughts from the smart minds here!
-
-
Rental Expected Sale Price: 220-240k
Mortage: 0 :)
We worked really hard on this and have had it clear for the last ~5 years and had some very nice rental income

Expected spend on fixing up before selling: 10k

Purchase price back in 2007: 189k (yes.....did not turn out to be an awesome time to purchase this, but value did eventually come up!)

------>This would mean capital gains are the difference between (51k?) let's say 240k sell and 189k paid?

I have depreciated it each tax year but not really sure what that means here (I just let turbotax do things for me)

We are not planning to do anything with the cash (~200k or so) right away. Will put big chunk into college for kids....and probably go to Disneyworld :)

Is there any scenario for us, given the information, to lower the cap gains we pay even more?


Note, have basically no knowledge of cap gains and such......just that they exist in this scenario.
-
-
If relevant for above info:

Married
Total Income: ~170k/year
2 kids
Own primary home
Value: ~700k
Mortage: ~400k
Roth IRA x 2---maxed for 2020 already
401k x 1---will max within the first 5 months of year (only 1 available to us through jobs)

No other debts
-
-
Appreciate any thoughts, tips, or advice here if there is anything we can prep for. Figured early in the tax year would be a good time to prepare in case there are some savings to be had somewhere.

Thanks all!
User avatar
LittleGreenSoldiers
Posts: 219
Joined: Fri Nov 14, 2014 6:59 pm

Re: What to know? Preparing to sell rental property

Post by LittleGreenSoldiers »

Depreciation Recapture.
Those 7 years of depreciation claimed get recaptured.

The depreciation gets subtracted from you original cost basis. There by increasing the capital gains on the sale.

Depreciation estimate:
$189,000 / 27.5 = $6,872
7 years x $82,472

original cost basis = $189,000 - $82742 = adjusted cost basis $106,258

Sale Price: $230,000 - $106,258 = Gain of ~$123,742
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: What to know? Preparing to sell rental property

Post by uwbadgers »

So then the 123k is taxed at 15%?

I believe that was the rate I’d fit into for cap gains.

About 18.5k in taxes owed?
Carefreeap
Posts: 3026
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: What to know? Preparing to sell rental property

Post by Carefreeap »

Review your receipts carefully. Did you do any capital improvements (replace carpet, water heater, etc) which are not fully depreciated? Now's the time to add them.

You will have sales and fix up costs, perhaps you will be repainting the unit? Replacing hardware, etc?

I doubt you will have much of a capital gain other than the depreciation recapture as mentioned in earlier post.

Save your receipts!!!
Every day I can hike is a good day.
seadreamer
Posts: 22
Joined: Fri Dec 07, 2018 4:42 pm

Re: What to know? Preparing to sell rental property

Post by seadreamer »

I'm in a somewhat similar position. Although not selling this year probably in 2-3 years.

I realize the above is a depreciation estimate but as I understand the yearly depreciation is the (cost - cost of land)/27.5. The land is not depreciable. Depending on the area and the condo the difference may be negligible.

Other fees that I'll include as costs of selling are: the realtor fees too which I'm guessing will be around 6%, possibly tax advice from a fee only planner, and cost of tax prep. I also use TurboTax but I plan to have someone do my taxes the year of sale.

I see that you did a Roth this year for yourself and spouse. I'm wondering if you will be above the Roth IRA limit this year. I was considering doing a traditional IRA in the year we sell.

Best of luck on the sale.
Maid of the Mist
Posts: 153
Joined: Sat Dec 04, 2010 5:50 pm

Re: What to know? Preparing to sell rental property

Post by Maid of the Mist »

Don’t forget state income tax - depending on the state you live in and the state where your rental is located.
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: What to know? Preparing to sell rental property

Post by uwbadgers »

seadreamer wrote: Fri Jan 10, 2020 10:05 pm I'm in a somewhat similar position. Although not selling this year probably in 2-3 years.

........

I see that you did a Roth this year for yourself and spouse. I'm wondering if you will be above the Roth IRA limit this year. I was considering doing a traditional IRA in the year we sell.
Didn’t even think of that. I’ll have to look into that more.

Anyone know the answer the the ROTH IRA question?
User avatar
Watty
Posts: 22429
Joined: Wed Oct 10, 2007 3:55 pm

Re: What to know? Preparing to sell rental property

Post by Watty »

A good way to figure out the tax impact is to dummy tax return using tax software. That will not be exact since you will be using the prior years tax software but it should be fairly close in most situations.

You may be able to manage your other income for the year to help your tax situation.

You should also look to see if you will need to pay IRMAA taxes because of the higher income.
panhead
Posts: 465
Joined: Fri Feb 22, 2013 10:53 am

Re: What to know? Preparing to sell rental property

Post by panhead »

uwbadgers wrote: Fri Jan 10, 2020 3:43 pm We will be selling our rental property this Spring. This is our one and only rental as we "fell" into it about 7 years ago. Just ready to be done with it now as it is a condo and the HOA is working on phasing rentals our so going to get out now and enjoy the cash :)

Main questions surround anything I should be aware of/plan ahead for due to the sale and large cash proceeds.

Relevant info below.....please let me know if more is useful in this case.

And, if there is nothing "extra" to do, that works too. Just thought I'd get some thoughts from the smart minds here!
-
-
Rental Expected Sale Price: 220-240k
Mortage: 0 :)
We worked really hard on this and have had it clear for the last ~5 years and had some very nice rental income

Expected spend on fixing up before selling: 10k

Purchase price back in 2007: 189k (yes.....did not turn out to be an awesome time to purchase this, but value did eventually come up!)

------>This would mean capital gains are the difference between (51k?) let's say 240k sell and 189k paid?

I have depreciated it each tax year but not really sure what that means here (I just let turbotax do things for me)

We are not planning to do anything with the cash (~200k or so) right away. Will put big chunk into college for kids....and probably go to Disneyworld :)

Is there any scenario for us, given the information, to lower the cap gains we pay even more?


Note, have basically no knowledge of cap gains and such......just that they exist in this scenario.
-
-
If relevant for above info:

Married
Total Income: ~170k/year
2 kids
Own primary home
Value: ~700k
Mortage: ~400k
Roth IRA x 2---maxed for 2020 already
401k x 1---will max within the first 5 months of year (only 1 available to us through jobs)

No other debts
-
-
Appreciate any thoughts, tips, or advice here if there is anything we can prep for. Figured early in the tax year would be a good time to prepare in case there are some savings to be had somewhere.

Thanks all!
I'll chime in with depreciation recapture as well.
I sold a rental this year so I'll be going thru this, and I sold one about 7 years ago as well.

If memory serves, this is the way it works:
Depreciation recapture will be at your marginal income rate or 25% which ever is less. So I'll assume 25% rate.

Depreciation recapture: only the building is recaptured, not the land. assume 10% land value:
189000*.90= 170,100
($170,100/27.5 years)*7 years = 43298, call it 43300
$43,300*.25 = $10,825 of depreciation recapture

Capital gains:
assume $230,000 sale
you will need to subtract your costs from this, realtor costs, etc. Lets assume about 6% costs: 0.06(230,000)= 13,800, lets call it $14,000
230,000-14,000 = 216,000

216,000 - 189,000 = 27,000
let's assume 15% capital gains rate 0.15(27000) = $4050
You should owe about

$10,825 depreciation recapture + $4050 cap gains = $14,875

Depending on your state, they may get their pound of flesh as well.

I didn't double check this, but this should be pretty close to how it works. I'm sure others will chime in.

Edited to add: If you look at your previous tax returns you can nail down some of these numbers, like how much you have depreciated up to this point. I made some basic assumptions about land value and tax rates.
Last edited by panhead on Sat Jan 11, 2020 4:20 pm, edited 1 time in total.
panhead
Posts: 465
Joined: Fri Feb 22, 2013 10:53 am

Re: What to know? Preparing to sell rental property

Post by panhead »

Watty wrote: Sat Jan 11, 2020 9:15 am A good way to figure out the tax impact is to dummy tax return using tax software. That will not be exact since you will be using the prior years tax software but it should be fairly close in most situations.

You may be able to manage your other income for the year to help your tax situation.

You should also look to see if you will need to pay IRMAA taxes because of the higher income.
Excellent advice. I've done this for my situation using 2018 tax year software.
Post Reply