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Sell Rental and Get Hit With Huge Capital Gains Tax?
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- Опубликовано: 16 сен 2021
- Sell Rental and Get Hit With Huge Capital Gains Tax?
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![How to Calculate Taxable Gain from Selling a Rental [Tax Smart Daily 020]](/img/1.gif)
We sold our old body shop of 19 years & was going to get hit with capital gains- so we put solar panels on the new body shop & got a 30% tax credit which ate that capital gains. 1/2 the electric bills, win, win! 🙌🏼
But you paid for the solar panels…. Still spent money.
Well either you can spend that money or the government will.
@@sootherelax2802 you would spend it on utility payments with the absence of the panels
your math is faulty you are making a "percentage fallacy" argument Your capital gain is paid as a parentage of your shops appreciation gain, the 30% tax credit is a credit against the cost of the panels not your capital gains on the property. You saved money as a the capital gains in consideration of the 30% deduction but you still lost money on the net of the cost of the solar panels.
You do a 1031 exchange, buy residential properties. Rent them. After 3 years (so when you add your 2 years of residence the exchange occurred five plus years ago), move into one of the homes converting it to your principle residence. Live there for two years, sell home keeping $250K/$500K (single/married) as tax free gain. Move into the next home for two years. Keep repeating until you get money out tax free. You will have to recapture only the amounts that were depreciated for taxes.
This is incorrect, the years in which the home was used for non-qualified purposes would still be subject to capital gains. For example, if you rented a property out for 6 years and lived in it for 4 years after those 6 years, you can exclude up to 40% of the capital gains up to 250k/500k, NOT 100%. So if the capital gain total was 250k exactly, you could exclude 100k (40% for the qualified period) but still need to pay taxes on the 150k (60% for the unqualified period). I hope nobody is taking tax advice from a non professional in a youtube comments section.
Hahahah.
Only 40% 2/5 rule sorry to tell you, unless you live in it for 5 years
@@Csharpflat5 - Incorrect. Lets be clear first, we are talking about sales of a property in America and the Federal capital gains taxes....we are not talking about the various rules state to state. You only need 2 out of the past five years as a home primary residence to qualify for the full deduction. If you lived in it for one year, then rented it for three years then moved back in and lived in it for another full year, you qualify. You can only use the exclusion once every two years.
For those who keep contending otherwise, sorry, but I had my parents do exactly this to get most of their previously rental home sales tax free. Never a problem. Again, state tax may be a different issue and you need to see those rules for that state. On the other hand you can avoid much of those as well by doing a 1031 Exchange to a state that has no state personal income tax and avoid the state....unless they have a "clawback" provision such as California does.
That is not how it works. Converting a rental into primary only protects you from taxes on appreciation when it was personal use not the prior years. In this instance, he will still pay taxes on the amount is appreciated for those 22 years it was a rental.
4:08 - correct, 2 out of the last 5 years *unless* you are military and vacated/rented the property because you took orders to another location. In that case the exemption lasts an additional 10 years which is pretty sweet. Still have to pay back some depreciation but not 15% capital gains tax.
Also a inclusion that allows people who moved for their jobs over 250 miles (I believe) some sort of exemption from Cap gains. And same for depreciation payback.
NOBODY talks about the hassles of actually pulling a 1031 exchange. I studied it, and tried it myself. It is a big headache. Very restrictive. And there is lawyer fees, Escrow fees, and 6month window that you HAVE TO close on the next property... these are the reasons why I just paid capital gains tax and be done with it. Paid tax and invested the cash in Nasdaq ETF QQQ. in 2 years, I've made MORE than the 15% tax I paid.
If you have a multi million dollar commercial building, like the one located in 1011 Reams Fleming Blvd, Franklin, TN... then 1031 exchange make sense. But for a little guys like us with cheap rental homes... just pay the tax and stay liquid. 15% tax is not too bad on a transaction where I actually made money.
My uncle did a 1031, he had a investment property in Cambridge MA, sold it for 1.4 million and took that money and invested it in a 30 unit building in Salt Lake City, UT.
1031s works great for me
Agreed...most people don't know this
A smart person would have bought index mutual funds and made more money without the headache and could move anywhere in the world without selling or only sell a small amount.
what complications? You have a 2 pages 1031 addendum file when your sales closes and you have to then buy another "like in kind" property within a designated time frame. It isn't very complicated at all
He should offer a rent to own lease option for his tenant..basically handing over responsibility for property management and the tenant is on a path to buying it....while collecting a slightly higher cash flow.
If you own it fully yes. Spread cash income over years.
you must have some dumb tenants to buy into a rent to own plan
Very good topic and video! More real estate guidance videos please!
Keep it as a rental.
Exactly. Then I think when he dies it gets transfered over at the current value. Then they can sell it tax free.
Let your heir sell it tax free
If he has a good renter that pays on time, it may be worthwhile to hold onto the property. I know somebody who was in his position. He sold his rentals with reliable tenants, consolidated those rentals into a larger apartment complex, but due to externalities that he couldn't predict, the apartment complex was never able to cash flow. He did end up selling the complex for a profit, but that was seven years after he originally purchased it. He had to wait out much of the 2008 recession before he could find a suitable buyer.
1031 into a Delaware Statutory Trust (DST). DSTs make the timelines easy to achieve, gives you economies of scale, and takes away all management headaches.
The current capital gains tax rate is 15% if your total taxable income (including the capital gain) is less than ~$440k. It’s 20% if the total income is higher than that. So in the example from this video, it’s most likely 20%
However, Congress just proposed raising the 20% capital gains rate to 25% effective 9/13/21. If the bill passes, and you don’t have a binding sales contract dated prior to 9/13, the rate will be 25% on any gains realized after 9/13, if the total income is over the ~$440k threshold. They’re planning to sneak this into the $3.5T “Build Back Better” bill.
Also you pay additional 3.8 percent more if you make over 250k married or 200k single.
Hello I read online that if you bought your home Prior to Jan 01, 2009 none of this being in the home 2 of 5 years apply to you. For example if I bought my house in 1999 (which I did), and lived in it for 7 years t hen rented it out , (still rented today), none of this should apply to me and im grandfathered in and can keep any profits I make...is this true? How do you interpret this rule?
Hello - Trying to see what my capital gains limitations are (or if any). Bought a duplex for $160k in Sep 2022, probably worth $180k-$185k. When is it a good time to sell a rental investment to limit capital gains? Please assist.
Love it when Dave mental maths the numbers. Really cool to see someone with a deep understanding of it.
And than he gets it wrong.
@@saulgoodman2018 Look at the likes. Being the majority doesn’t make it correct. Lol
@@genxx2724 SO. That does not mean anything. He is still bad at doing math in his head.
@@saulgoodman2018 What I’m saying is, so far 8 people admire his math. Only 3 do not (assuming commenters don’t ”like” their own comments). You and I are outnumbered, but we are correct.
@@genxx2724 Who care about any likes?
Only gen z and gen alphas care about likes.
Where are the typical Dave Ramsey questions.....are you in any other debt? How much do you make a year? Is your current home paid off? Dave struggled to give advice on this one because the best path typically involves leverage of more debt to grow wealth exponentially.
Depreciation recapture is 25% then the rest of the gain is 15%
I have a friend who did a 1031 exchange when she sold one vacant lot and bought another. Fine, but now she wants to build a primary residence on it. I keep telling her I don't think that's how 1031 works.
So if you have to live in it for 2/5 years to not pay property gains taxes. Move into the rental and live there for 2 years and then sell it. I believe it is one way to do it. But I am no expert.
you have to be careful and show your "intention" was not to use the tax avoidance plan you stated here
Never sell 1031 exchange til death + write off depreciation + heloc/ cash out refi life style .
You only pay capital gain on the difference between the purchase price, and the sold price.
So it will be lee than 90k in tax.
This is incorrect depending on depreciation.
Well that is true unless if for a rental you take depreciation on your taxes. Doing that brings the basis(your purchase price) down by the depreciation. Which eventually goes to zero. I mean you do get to take the 15K depreciation off for the 15 or so years it goes to zero.
@@milkcowx But the thing is, it's still less than 90k.
There should be no depreciation. Because the house went up.
@@saulgoodman2018 Sorry Saul, when I say depreciation I mean it in the tax law meaning. Not that the house is actually worth less now then it was then.
When you have rental properties there is a "depreciation" schedule for the building and certain things that you get for it as well. Appliances, flooring, roof etc etc. The tax code allows landlords to deduct the "depreciation" of those things against the current years taxes. The house for example is depreciated over 27.5 years.
They government get's its cut when you sell though. As the purchase price is effectively reduced to zero. So whatever you sell it for you end up paying a capital gain on all of it.
As Dave mentioned a way around it is to do a 1031 exchange ( another tax code maneuver ) that allows you to continue deferring the taxes owed.
@@redfox435cat I did not say that I know everything.
In any case, it'll still be less than 90k.
Well, if he stays a default landlord he will continue to pay property taxes and will also pay income tax on the rent, in addition to incurring ongoing maintenance costs. This is in addition to the risk that in the future tenants will not pay rent and/or otherwise damage the property. So I see it as pay now or pay later. I say pay the tax now and do with the remainder what he wants.
He'd be paying taxes on the extra money he's making. That's not comparable to getting slaughtered by capital gains if he sells, it's way better.
Real estate is going to keep going up. We are in hyper inflation so it is going to push prices up everywhere including housing.
I did cash out refi from equity bought another property and let the renters pay my debt off. If it gets bad I’m 75% LTV so I still have 150 I can get if I sold it but I’ll let renters pay it down for awhile then maybe sell later. Grand said NEVER SELL!! Revolving equity etc etc use the equity to fund more adventures
What about recapturing of depreciation if you just rented a room (not a rental property)? Mother rented a room and the accountant depreciated the sqft of the rooms that were rented (so not the whole house and it wasn't a "rental property") It was her primary home (still is) The house is in a revocable trust, going to my wife (sole beneficiary) So when we go to sell the house once it's passed down in the trust to my wife, does depreciation follow the house? Will we have to pay the recapture of depreciation? Don't even have a clue what those numbers are. I just know they depreciated the sqft of the room when I came across some old returns. Thanks
I’m in this exact same situation right now and don’t know what to do. I currently have a town home that is worth $350k (I purchased for $145k) and I have been renting it out the last 4 years. Currently the mortgage is only $45k and I only get $1300 rent per month. I want to sell and take my equity and pay off my primary home (currently mortgage of $225k on primary home) but my tax pro says it’ll be about $30k in capital gains. I can’t decide what to do. 😐
Do a cash out refinance and pull $225K in equity from the rental and pay off your primary home.
How much will you pay in interest for the remainder of your mortgage? If the capital gains is less, I think it's worth selling.
@@suyashvijay5542 Have you ever listened to Dave Ramsey? It wouldn’t solve anything, it would just be transferring debt from one house to the other.
Cash out refi, pay off the primary home, keep renting and deduct the losses from your taxes if you don't make too much, otherwise maybe don't cash out everything you can. Make sure you're charging market rent.
@@1timothydillon it won’t be much, maybe about $4000-$5000 in interest or less. It’s currently on year 7 of a 10 year note.
Move back into the home for two years? Could possibly be worth the $90k depending on the rest of his financial picture.
Sorry about my earlier reply. I was conflating this with others’ comments about paying off the mortgage on his residence. I’m actually chewing on the same idea - moving in. The depreciation deductions taken over the years would still be recaptured.
@@genxx2724 But then you won't get charged cap gains tax on the first $500k, right? So the tax bill will be negligible. I'm definitely no expert, but it is something I've thought about for my own rental.
@@jay12187 I think the depreciation recapture will be more than negligible, as it’s been rented out for 10 years. I will retire in three years. I’m thinking about selling my place and living in the rental so it becomes my residence, even though I don’t want to live there. It’s a very basic unit in a 1960s retirement neighborhood. The immediate surrounding area declined years ago and sketchy people intrude into the neighborhood, although okay areas are nearby. Then I would sell it and buy a house I want. I think I will get the capital gains exclusion on each sale. I hope I will also get to transfer the property tax basis on what was the rental to the final residence. I’m in Southern California. The other issue is the value of time. Is it wise to spend a few precious years of retirement playing chess with the taxing authorities? What if something happens to my health and I never get the home I wanted, and wasted time in the hood?
@@genxx2724 I was referring to the caller's specific situation. Sounds like he has it depreciated down to $0 so he'll pay cap gains on the entire $500k+ sale price. If he lived there for 2 years, he'll pay only cap gains on the sale price less $500k. Again, this is just my understanding and I could very easily be wrong. Someone please correct me if that's the case.
Obviously the house/neighborhood are huge factors on whether or not you'd want to live there, but it should be considered an option to avoid the taxes.
@Jay Foster anything you depreciated will have the sale taxed at ordinary income rates, not capital gains rates.
How about 1031 exchange followed by 721 UPREIT?
Nice video trends!!! Very engaging from beginning to end. Thanks there for this information.
Nevertheless business and Investment are the easiest way to create money and live the comfortable life you've thought of. Now!! I'm at the conclusion: to start my own company with $900k next mnth.
🤑🤑🤑🤑🤑🤑🤑🤑🤑🤑
Push on man.. right decision 💪
Hello!!
My name is Teresa, I'm 25 year old Portuguese and still living in Portugal. At the moment I'm studying more than working, I don't have much money to invest but I'll try start this month. I want to be financially independent at least 30.
Yeah! Investments are stepping stone to success. I remember quiting gambling the channeling all my salary in buying of Gold, Bitcoin and Tesla stock with $500k I won from lottery betting back in 2017. For now I'm okay with the $30,000 profit I earn every month from bitcoin investment than being a crazy CEO that earns half of my dividend.
I'd realized at 35 yrs that "the secret to make a million dollar is through rational thinking and making the right decision toward creating more opportunities!!!
I spent half of my salary investing in Gold, silver, Tesla stocks and cryptocu. From all, it'd seems like the crypto (bitcoin) is more profitable as the profit generates within seconds.
1031 into a larger cash flowing property.
I don't think Dave is explaining the capital gain tax correctly, you don't pay capital gain on the new value, you pay on the amount you originally paid plus the depreciated amount, the rate is 15%.
no you pay on the difference between the bought and sold price with the depreciation recaptured
Am I missing something... why doesn’t Dave advise on keeping the rental and remortgaging it? In my mind, the reason we buy appreciating assets is so we can borrow (tax free) against them, not sell them.
Well, he didn’t buy it, so likely never had the intention of leveraging. He said he became a landlord by default. He may have inherited the house. And you know Dave hates debt and leverage.
Dave never says go into debt.
Is unbelivable this man is afraid of capital gain taxes, that's the lowest tax bracket ever.
why pay it if you can avoid it?
Misleading advice. He is actually going to have to pay regular income tax on whatever part of the value that he depreciated, so it will probably be much higher than 90k in taxes depending on what the original purchase price was.
It is not income tax, it is capitol gains tax that are paid based on the cost basis.
@@run4cmt when you depreciate an asset, you write it off against normal income, so when you sell it, that part of the gain is taxed as normal income.
@Ivor Van Wingerden yep
If you have real estat you should have a tax person that has knowledge and experience with a 1031 exchange
The last laughter about the "bad policy." The general rule is that selling assets at a gain is taxable. The "principal residence" rule is a tax benefit passed years ago by Congress to protect homeowners from paying taxes on appreciation in their homes' values. But I guess because it was targeted to homeowners, and the one guy here just found out it did not also extend to rental property, it is "bad policy" that you can rail about. Smh
If I had that good landlord I’d keep it personally
He could sell his current home and get the personal property tax waiver, then "move into the home" for 2 years then get the personal property tax waiver. What I'm fixing to do.
They closed that loophole. The exemption is prorated according to the percentage of time you've owned the property (after 1997) and the time it's been your primary residence. And factor in depreciation recapture, which in most cases is taxed at 25%.
@@fuzzzyyellow I think you are mixed up. He is referring to a 121 tax exclusion which he is calling by the silly name of " personal property tax waiver"
This is why I invest in REITs. Less financial headache for me lol
REITs does not mean you are a Landlord. You can not expense your cell phone, gas, car, home office, laptops, tablets, tools, electricity, HOA, etc... And I would argue that you would make more money investing in a Index fund.
@@johnSmith-uz8nl 👈im with this bloke
REITs return relative to the Dow and S&P aren't great. Which REIT has been preforming wonderfully for you?
Sell it, pay the taxes, move on with your life.
Over my dead body will the IRS get one over me.
@@TopShot501st so keep it and continue to pay property tax etc.......
I’m so confused right now, can someone explain? He said that his property has increased in value significantly, so what exactly depreciated in value? Why did Dave say that?
The "depreciation" they're discussing is wear and tear on the home. Each year, you're allowed deductions on your rentals based on "use."
@@astroman30 got it, thanks man
If his current house is worth less, could he do the 1031 and move into the new home for 5 years, sell his current home, and then downsize in 5 years and get the exemption?
You can't do a 1031 into a property you already own.
@@braceyourselvesfortruth2492 No, but you can sell the rental, buy a new house to live in, and sell your current house if it is worth less than the rental. The current house is not a rental, and thus the first .5Million is exempt. Then you 1031 the rental revenue into the new house and live in it for 5 years, and it is also exempt. If you are in no hurry for the money, this seems to be a work around, if it is legal. My question is, is this legal?
@@timmcdonald9856 you can't 1031 into a private residence, only another rental or rentals that are of greater value collectively than the one you are selling. Even if he rented out a new house for awhile and converted it to his private home, he would still owe taxes on capital gains and depreciation recapture when he sells it, just not on appreciation that happened while it was a private residence.
@@braceyourselvesfortruth2492 You can. But what is the time restriction- any? Tax amount? Does it go back and you owe for entire prior prop then.
@@HappyPenguin75034 you have 90 days to 1031 into a new property or properties. If you don't close the deal in time, you owe taxes. How much depends on how much depreciation recapture as well as capital gains, both are dependent on your income tax rate at that time. This really sucks if you were planning on selling the properties after you retire and have much less taxable income, meaning you wouldn't owe nearly as much.
Sell it as owner financing so you can get paid for few years ahead and pay less tax
I don't believe that helps unless you're talking about "rent to own".
@@lynnebucher6537 it does , this method getting more popular by a day , RUclips it please
Get rid of the government
Real Estate will not go down????? DAVE IS DILUSIONAL again. I don't see it going down in the near future is the right answer.
It might go down. But I have been watching for 50 years and have seen it go down one time...and within 2 years it had recovered all the losses. Only exceptions are mismanaged properties or foolish investments as far as I can tell. Foolish investments are anything in a Democratic ran city or anything below sea level.
@@timmcdonald9856 So prices fell in 1981 and in 2008.
@@johnSmith-uz8nl Actually not much in 1981 in most places, and in 2008 prices had recovered within two years. Like anything else, there are exceptions. Stock market always goes up too....but individual stocks Synchrony, Citizen's Bank, Whirlpool, Gap, Viacom,Xerox, Carnival,Alcoa,Kohl's, Macy's,Halliburton,Enron, a lot of others that seems to be pretty stable investments that are either gone or a fraction of the value they used to be.
@anthony davis will win what??? The reward for most needless deaths due to covid?
@@timmcdonald9856 You're babbling.
Ah, but what if I own a rental, and live in one of the units, is it an investment, or a personal property?
the half you rent is not personal property. I know this because I depreciated the rental half I do not live in.
I just sold a property in Portland and I'm thinking of putting the cash in stocks, I know everyone is saying it's ripe enough, but Is this a good time to buy stocks? How long until a full recovery? How are other people in the same market raking in over $200k gains with months, I'm really just confused at this point.
@HerryThompson It all depends on how long you're willing to hold for, stocks might likely tank further, but making serious gains in this downtrend wouldn't be a problem if you're a pro.
@HerryThompson Hi, please who is the expert assisting you and how do I reach out to them?
dude you need a solid financial advisor. Asking those kinds of questions on RUclips is a horrible idea
He’s probably in a hot neighborhood that house will jump up
I'm a little surprised and disappointed, nothing else was mentioned. There are numerous other ways the capital gains can be deferred, reduced, or eliminated (oil and gas investments, opportunity zones, charitable trust). Those may not fit the callers situation, but at least the point could have been mentioned.
have you heard the financial sophistication of his listeners? Just read the comments section here on RUclips. You are talking about a pretty ignorant audience
Oops, property values did go down.
1031 exchanges are nice, but where’s my 721 exchange with DST gang?
I think you mean 721.
@heroshyma69 you are correct.
At the end of your life does will it really matter if you figured out a way to beat some capital gains tax? How bout just pay it and walk away with your remaining profits and enjoy life.
So, if the dude wanted to live at that house for 4 years, he could sell without tax? Hmm… long time to wait though…
its 2/5 years, not 4 years. You are thinking of a 121 tax exclusion
You got the house for free and you are worried
It is a responsibility, and correct decisions must be made. That’s how smart people prosper, instead of demanding handouts, resenting others, and wanting to take what they have.
So even if you’ve lived in it for the last 3 years, because you rented it out the previous 2, that makes it a rental?
Other way around. If you've lived in it for at least 2 of the last 5 years, you can exclude the first $500k of capital gains (if you're married. $250k if single)
Jesus saves. Love you guys.
Borrow max amount on the property.
Pay tax on profit after finance.
assuming your home gain is higher than your loans interest rate
@@steveb7600 has nothing to do with interest rates.
Pay 500k for a house. The property is now worth $1m. Your tax bill is on 500k.
Get a loan 80% of value, sell for 1m, your tax bill is is zero
I'd say within a year, the market will crash shortly followed by the real estate market. If you are thinking about selling, now is the time.
It's hard to foresee...
Oh, is the top in?
June 2022 was too. Down 6 mid after. Then up last 6 months. Still down from top until rates come down.
Leave politics out of it. Republicans give it to the rich and take it from the middle guy.
UBI baby!!
Call the wahmbulance
The other guy shows his ignorance. He deducted the depreciation for 22 years, it is just a recapture of that depreciation and the rest is taxes because it is like an income. Nothing to do with democrats vs republicans.
He only wants to stop being a landlord because he thought he was going to be able to cash in. Guy needs to hire a property manager, cash out refi (no taxes) and keep renting.
1031!!! 1031!!!!
Let's go Brandon
classy
Lol
There IS no capital gains tax...... according to the IRC of 1954 passed into law by the 83rd Congress taxable years ended August 16 1954!!!! Google 26 CFR 1.0-1 paragraph (d).
try not paying taxes on your income property's sales gain and see what happens
Casey the Spammer was spamming on Minority Mindset about an hour ago. 🤦♂️
Who cares what Casey does? You follow someone around claiming they're spamming, while you are spamming about them spamming... Pathetic
@@1timothydillon - Oh no. Did Timmy’s feelings get hurt? 😂
@@rlopez2626 - Well said Humor!
@@1timothydillon - You must be spamming and one of Casey’s friends. 😂
@@appleforever6664 Yawn! None of you matter to me, I just recognize pathetic trolls when I see them.