The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: AnInvestingThrowaway on October 07, 2014, 04:11:38 PM
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Hello,
I typically buy rental houses to keep, but in this case, I ended up getting the home my wife grew up in in a short sale and fixed it up, and the neighborhood's rent to value is very much skewed in terms of the value. It doesn't make much sense to rent the property when it can sell for 20x the annual rent.
So, now that it's completed, I've decided to sell it instead of keeping it as a rental. It's a beautiful home and we put at ton of work in to it, almost completely remodelling it except keeping the original woodwork and restoring it.
However, due to a major issue with my first contractor, it is WAY behind schedule. A four month major remodel has taken eight months. There is a tremendous amount of equity in the house, but I'm getting very tight on money.
The sale closed in January. It is October now. Should I sit on the house and eat three more months of holding fees so that when I sell it, it is past the one year point, to save in those taxes? I cringe at the thought because my finances are tight and I just got it staged and want to move forward after the logistical nightmare, but maybe I'm being unwise financially since taxes will eat a huge portion.
It is my understanding that after the one year point, it counts as capital gains. Is this correct?
Numbers:
(all numbers approximate and rounded)
* Purchase price: $70k
* Remodel costs: $70k
* (Sum of sunk costs: $140k)
* Estimated sale price: $250k
* Estimated sale profit: $110k minus realtor (if used) and taxes
* Estimated rental value: $1300/mo
* Approximate monthly holding cost: $1500/mo (combination of taxes, insurance, a small hard money loan, and a HELOC.)
If I DO sit on the house, when should I start marketing? December?
Thanks for all your thoughts.
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It is my understanding that after the one year point, it counts as capital gains. Is this correct?
Not necessarily. Intent matters. If you intended to flip, and it took 18 months, it can still be earned income.
If you intended to rent, but happened to sell in under a year, it could even be considered long term capital gains (though you'll get pushback from the IRS, I know people for whom this has worked).
Written business plans ahead of time are good to show intent. If you rent it for awhile, that helps.
Just selling it after it's been longer than 1 year doesn't automatically make it LTCG.
Consult with your CPA.
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It is my understanding that after the one year point, it counts as capital gains. Is this correct?
Not necessarily. Intent matters. If you intended to flip, and it took 18 months, it can still be earned income.
If you intended to rent, but happened to sell in under a year, it could even be considered long term capital gains (though you'll get pushback from the IRS, I know people for whom this has worked).
Written business plans ahead of time are good to show intent. If you rent it for awhile, that helps.
Just selling it after it's been longer than 1 year doesn't automatically make it LTCG.
Consult with your CPA.
This is interesting. I intended to rent it, but later realized the area's rent to value ratios just don't make sense to rent. I never attempted to market it as a rental though, as I realized this during the remodel phase. (On a side note: My short sale negotiation took nearly two years!! During which it sat vacant and abandoned.)
I'm not sure I'd really have any way to prove it, though. And frankly, I'd be concerned to do a short term rent, because I really, really cleaned the house up in a high end manner and renters can trash the woodwork easily.