Author Topic: Selling a rental property; can you all check my assumptions on taxes  (Read 2192 times)

GerryS

  • 5 O'Clock Shadow
  • *
  • Posts: 20
  • Age: 43
  • Location: San Diego
Hello everyone:

My wife and I expect to close on a rental property we own 12/14/2015. The tax implications are complicated so I thought I would turn here for a sanity check.

First the background info:
  • We live in CA. The property is in CA
  • Property was purchased 12/2006 by my wife (then a single gal) for $310,000
  • We installed new windows in 2010 at a cost of $2450
  • We installed new blinds in 2010 at a cost of $396
  • We lived in the property until 7/2012
  • Property was first rented out 8/2012
  • 2012 Tax return lists depreciation value as $223,200 over 27.5yr period
  • 2014 Tax return lists un-allowed passive activity losses of ($23925)
  • Contract sales price is $355,000
  • Sales Commissions of 5% are $17,750
  • We recently spent $2550 improving the property for sale; painting, installing new closet doors

I think that covers the details. Now to my questions. The first set of questions is about the 2 out of 5 rule in IRC Section 121.
  • The 5 year count back starts 12/14/15 and covers the time period 12/14/10 - 12/14/15, correct?
  • We used the property as our primary residence from 12/2010 - 7/2012, a period of 20 months. Does this exclude us from the 2 out of 5 rules?
  • Are we able to get a prorated 2 out of 5 tax treatment
  • does it make sense to pursue the 2 out of 5 treatment or just go with a capital gain sale on a rental property given the above data
the second set of questions is about my math to figure a net gain/loss
  • My cost basis is $312,846 correct?
  • I need to adjust basis by reducing it by amount of depreciation taken, correct? ($8116/yr)
  • Factor in passive losses of $23925 to further adjust basis, correct?
  • to figure my net gain/loss I start w/ sale price - commission - final adjusted basis = gain/loss

Frugalman19

  • Bristles
  • ***
  • Posts: 257
Re: Selling a rental property; can you all check my assumptions on taxes
« Reply #1 on: December 07, 2015, 10:19:55 PM »
Hello everyone:

My wife and I expect to close on a rental property we own 12/14/2015. The tax implications are complicated so I thought I would turn here for a sanity check.

First the background info:
  • We live in CA. The property is in CA
  • Property was purchased 12/2006 by my wife (then a single gal) for $310,000
  • We installed new windows in 2010 at a cost of $2450
  • We installed new blinds in 2010 at a cost of $396
  • We lived in the property until 7/2012
  • Property was first rented out 8/2012
  • 2012 Tax return lists depreciation value as $223,200 over 27.5yr period
  • 2014 Tax return lists un-allowed passive activity losses of ($23925)
  • Contract sales price is $355,000
  • Sales Commissions of 5% are $17,750
  • We recently spent $2550 improving the property for sale; painting, installing new closet doors

I think that covers the details. Now to my questions. The first set of questions is about the 2 out of 5 rule in IRC Section 121.
  • The 5 year count back starts 12/14/15 and covers the time period 12/14/10 - 12/14/15, correct?
  • We used the property as our primary residence from 12/2010 - 7/2012, a period of 20 months. Does this exclude us from the 2 out of 5 rules?
  • Are we able to get a prorated 2 out of 5 tax treatment
  • does it make sense to pursue the 2 out of 5 treatment or just go with a capital gain sale on a rental property given the above data
the second set of questions is about my math to figure a net gain/loss
  • My cost basis is $312,846 correct?
  • I need to adjust basis by reducing it by amount of depreciation taken, correct? ($8116/yr)
  • Factor in passive losses of $23925 to further adjust basis, correct?
  • to figure my net gain/loss I start w/ sale price - commission - final adjusted basis = gain/loss

Hey Gerry, I'm a tax preparer in San Diego, you really really shouldn't do this on your own. Go get your taxes done professionally, even if it's just for one year. You don't want to make a mistake with these types of numbers. I can tell you 100s of stories of people messing up your exact situation, that cost them thousands of $$$. Go pay someone $300 to do it right. Trust me.

Lastly, do you know how much incorrect information I've seen on these threads?? Seriously, I'm not trying to sell services, but if you want me to refer you to someone close to you, you can message me.
« Last Edit: December 07, 2015, 10:22:08 PM by Awgolfer »

DevoCPA

  • 5 O'Clock Shadow
  • *
  • Posts: 40
  • Location: California
Re: Selling a rental property; can you all check my assumptions on taxes
« Reply #2 on: December 10, 2015, 03:55:55 PM »
The 2 out of 5 rule does not apply in your situation, this is a sale of a rental property, not personal residence. Your basis = 223,200 + 2,550 - Accumulated Depr for the building plus the FMV of the land on 8/2012. Passive losses are taken on Sch E and do not go into your basis calculation.

Yes, sales price- commission - basis = gain/loss. But since you are dealing with depreciable real property, a portion of your gain will be section 1250 gain taxed at 25%.

I would worry about anyone only charging $300 to prepare this return.

DevoCPA

  • 5 O'Clock Shadow
  • *
  • Posts: 40
  • Location: California
Re: Selling a rental property; can you all check my assumptions on taxes
« Reply #3 on: December 10, 2015, 04:56:22 PM »
Sorry, I misspoke. The 2 of 5 rule does apply because you are outside the 5 year window. 12/14/10 to 7/2012 is not 24 months. Check out irs publication 523.

Frugalman19

  • Bristles
  • ***
  • Posts: 257
Re: Selling a rental property; can you all check my assumptions on taxes
« Reply #4 on: December 10, 2015, 05:09:55 PM »
The 2 out of 5 rule does not apply in your situation, this is a sale of a rental property, not personal residence. Your basis = 223,200 + 2,550 - Accumulated Depr for the building plus the FMV of the land on 8/2012. Passive losses are taken on Sch E and do not go into your basis calculation.

Yes, sales price- commission - basis = gain/loss. But since you are dealing with depreciable real property, a portion of your gain will be section 1250 gain taxed at 25%.

I would worry about anyone only charging $300 to prepare this return.

Simply not enough information and so many moving parts, he only needed the info to file form 593
$300 is cheap maybe find a family friend haha, just make sure they are an Enrolled Agent or a CPA