Counting rental property equity toward our retirement savings?

[buddhapeace1]

We own a rental home that we will sell somewhere down the road. What do you think about counting the equity toward our retirement savings goal? I never have, but it sure would make a huge difference on paper and we will eventually realize the gain. Thanks!

[Freedomin5]

I would if you plan to sell it at or before retiring. However, if you plan to keep it and live off the cashflow, then I would only count the cashflow as an additional income stream.

It's similar to a situation where you own your primary residence, but you plan to sell and rent in retirement. In that case, you would count it toward retirement savings. But if you're of the mindset that you're going to live in your home until you die, then you wouldn't count your primary residence towards your retirement savings.

[uniwelder]

I would if you plan to sell it at or before retiring. However, if you plan to keep it and live off the cashflow, then I would only count the cashflow as an additional income stream.

It's similar to a situation where you own your primary residence, but you plan to sell and rent in retirement. In that case, you would count it toward retirement savings. But if you're of the mindset that you're going to live in your home until you die, then you wouldn't count your primary residence towards your retirement savings.

+1.  I think this response covers it.

[buddhapeace1]

I would if you plan to sell it at or before retiring. However, if you plan to keep it and live off the cashflow, then I would only count the cashflow as an additional income stream.

It's similar to a situation where you own your primary residence, but you plan to sell and rent in retirement. In that case, you would count it toward retirement savings. But if you're of the mindset that you're going to live in your home until you die, then you wouldn't count your primary residence towards your retirement savings.

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

[Freedomin5]

I would if you plan to sell it at or before retiring. However, if you plan to keep it and live off the cashflow, then I would only count the cashflow as an additional income stream.

It's similar to a situation where you own your primary residence, but you plan to sell and rent in retirement. In that case, you would count it toward retirement savings. But if you're of the mindset that you're going to live in your home until you die, then you wouldn't count your primary residence towards your retirement savings.

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

Yes, during the years that you still own the rental property, the rent is counted as income. Since you will sell it before you retire, you can count the equity (or more specifically, the estimated net proceeds, which is equity minus any costs related to selling) as retirement savings.

[Taran Wanderer]

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

But remember that you’ll lose part of that equity to capital gains taxes.  And if you’re depreciating the asset on your taxes today, you’ll be exposed to more capital gains.

[Jaybo]

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

But remember that you’ll lose part of that equity to capital gains taxes.  And if you’re depreciating the asset on your taxes today, you’ll be exposed to more capital gains.

This is true.  Your capital gains will be taxed at whatever your long-term capital gains rate is at the time of sale, but regardless of that, your depreciation recapture is always a flat 25%.  Make sure you are taking depreciation EVERY YEAR if you are eligible.  Some people don't wan't to mess with depression recapture so they never take it thinking that since they never took it, they'll never owe it...BAD MOVE.  Whether you ever take it or not, the Federal Government always assumes you are and you will have to pay it even if you never claimed it.

[clarkfan1979]

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

But remember that you’ll lose part of that equity to capital gains taxes.  And if you’re depreciating the asset on your taxes today, you’ll be exposed to more capital gains.

This is true.  Your capital gains will be taxed at whatever your long-term capital gains rate is at the time of sale, but regardless of that, your depreciation recapture is always a flat 25%.  Make sure you are taking depreciation EVERY YEAR if you are eligible.  Some people don't wan't to mess with depression recapture so they never take it thinking that since they never took it, they'll never owe it...BAD MOVE.  Whether you ever take it or not, the Federal Government always assumes you are and you will have to pay it even if you never claimed it.

"Depreciation recapture is always a flat 25%"? I did a quick Google search and according to Turbo Tax, the depreciation recapture is capped at a maximum of 25%, not always a flat 25%.

https://turbotax.intuit.com/tax-tips/rental-property/depreciation-recapture-definition-calculation-and-examples/c5H96UGw8

If you sell the rental property in the first year of retirement and don't have any W-2 income, the first $89,251 of capital gains will be taxed at 0%, for a married couple. If you had 80,000 of ordinary income (after deductions), your first $9,251 worth of capital gains would be taxed at 0%. After that, it's 15%.

[uniwelder]

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

But remember that you’ll lose part of that equity to capital gains taxes.  And if you’re depreciating the asset on your taxes today, you’ll be exposed to more capital gains.

This is true.  Your capital gains will be taxed at whatever your long-term capital gains rate is at the time of sale, but regardless of that, your depreciation recapture is always a flat 25%.  Make sure you are taking depreciation EVERY YEAR if you are eligible.  Some people don't wan't to mess with depression recapture so they never take it thinking that since they never took it, they'll never owe it...BAD MOVE.  Whether you ever take it or not, the Federal Government always assumes you are and you will have to pay it even if you never claimed it.

"Depreciation recapture is always a flat 25%"? I did a quick Google search and according to Turbo Tax, the depreciation recapture is capped at a maximum of 25%, not always a flat 25%.

https://turbotax.intuit.com/tax-tips/rental-property/depreciation-recapture-definition-calculation-and-examples/c5H96UGw8

If you sell the rental property in the first year of retirement and don't have any W-2 income, the first $89,251 of capital gains will be taxed at 0%, for a married couple. If you had 80,000 of ordinary income (after deductions), your first $9,251 worth of capital gains would be taxed at 0%. After that, it's 15%.

Thanks for the Turbotax link!  It has a great explanation of how depreciation is taxed, which has been a bit of mystery to me and others here.  There was another thread where @Mr. Green (if someone can figure out how to make the @ work properly for him, please let me know) was asking about depreciation recapture--- https://forum.mrmoneymustache.com/taxes/rental-re-tax-form-question/
I've tried looking up depreciation info before, but never seen it explained well.  Here's a copy/paste from their site of an example----

"You bought an office building five years ago for $2 million. Since then, you claimed depreciation deductions for the property totaling $256,000 using the straight-line method. You then sell the building for $2.1 million. The property’s adjusted basis when you sell it is $1.744 million ($2,000,000 - $256,000 = $1,744,000). That means you have $356,000 of gain ($2,100,000 - $1,744,000 = $356,000). You have no other gain or loss from the sale of business property.

Since the amount of gain exceeds the depreciation deductions, only $256,000 of the gain is treated as capital gain but taxed at the ordinary income tax rates up to a maximum of 25%. The remaining $100,000 of gain ($356,000 - $256,000 = $100,000) is treated as capital gain and taxed at the long-term capital gains tax rates (i.e., up to 20%)."

The person will pay regular income tax (up to 25%) on the depreciation, then pay long term gains tax on the amount exceeding the original purchase price (actually cost basis, which would include things like legal/realtor fees, repairs before being rented out, etc)

[clarkfan1979]

Then it seems I should count the equity as retirement savings if we're definitely going to sell it at some point and count the income as income for the years we'll rent it.(?)

But remember that you’ll lose part of that equity to capital gains taxes.  And if you’re depreciating the asset on your taxes today, you’ll be exposed to more capital gains.

This is true.  Your capital gains will be taxed at whatever your long-term capital gains rate is at the time of sale, but regardless of that, your depreciation recapture is always a flat 25%.  Make sure you are taking depreciation EVERY YEAR if you are eligible.  Some people don't wan't to mess with depression recapture so they never take it thinking that since they never took it, they'll never owe it...BAD MOVE.  Whether you ever take it or not, the Federal Government always assumes you are and you will have to pay it even if you never claimed it.

"Depreciation recapture is always a flat 25%"? I did a quick Google search and according to Turbo Tax, the depreciation recapture is capped at a maximum of 25%, not always a flat 25%.

https://turbotax.intuit.com/tax-tips/rental-property/depreciation-recapture-definition-calculation-and-examples/c5H96UGw8

If you sell the rental property in the first year of retirement and don't have any W-2 income, the first $89,251 of capital gains will be taxed at 0%, for a married couple. If you had 80,000 of ordinary income (after deductions), your first $9,251 worth of capital gains would be taxed at 0%. After that, it's 15%.

Thanks for the Turbotax link!  It has a great explanation of how depreciation is taxed, which has been a bit of mystery to me and others here.  There was another thread where @Mr. Green (if someone can figure out how to make the @ work properly for him, please let me know) was asking about depreciation recapture--- https://forum.mrmoneymustache.com/taxes/rental-re-tax-form-question/
I've tried looking up depreciation info before, but never seen it explained well.  Here's a copy/paste from their site of an example----

"You bought an office building five years ago for $2 million. Since then, you claimed depreciation deductions for the property totaling $256,000 using the straight-line method. You then sell the building for $2.1 million. The property’s adjusted basis when you sell it is $1.744 million ($2,000,000 - $256,000 = $1,744,000). That means you have $356,000 of gain ($2,100,000 - $1,744,000 = $356,000). You have no other gain or loss from the sale of business property.

Since the amount of gain exceeds the depreciation deductions, only $256,000 of the gain is treated as capital gain but taxed at the ordinary income tax rates up to a maximum of 25%. The remaining $100,000 of gain ($356,000 - $256,000 = $100,000) is treated as capital gain and taxed at the long-term capital gains tax rates (i.e., up to 20%)."

The person will pay regular income tax (up to 25%) on the depreciation, then pay long term gains tax on the amount exceeding the original purchase price (actually cost basis, which would include things like legal/realtor fees, repairs before being rented out, etc)

Glad you got value out of the Turbo Tax link. The description from Turbo Tax combined with your logic makes sense. I just did my taxes on Sunday. I filed for an extension. I'm currently in the 12% tax bracket. When I depreciate my rentals, I'm "avoiding' paying that taxable income within the 12% tax bracket. If I was to sell in the future, it wouldn't make sense for me to have to pay a flat 25% tax for depreciation recapture. Assuming I stay in the 12% tax bracket (and tax brackets don't change), when I sell, I will pay the 12% tax for depreciation recapture.