Author Topic: Tax relief?  (Read 468 times)

M1ngham

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Tax relief?
« on: September 14, 2020, 08:14:10 AM »
I have owned a rental property since 2013 and I think it's time to get out of the landlord business.  I think, when we settle up, I will realize about $100k profit.  Is there anything I can do to reduce the tax bill on that $100k?

Enough

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Re: Tax relief?
« Reply #1 on: September 15, 2020, 10:17:40 AM »
None that I am aware of.  I intend to sell my rentals after FIRE and only sell 1/year.  My low AGI in FIRE will reduce the tax bill.  But if you are looking at $100k gains on a single property, then that sale alone will put you in the high cap gains tax bracket.

SeattleCPA

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Re: Tax relief?
« Reply #2 on: September 15, 2020, 10:44:23 AM »
I'd be surprised a $100K sale puts you in the top 20 percent capital gains bracket...that's taxable income before the $100K of well over $400K.

You may over the 3.8 percent Obamacare tax (that kicks in at $200K for singles and $250K for married taxpayers).

Note that if the $100K is depreciation recapture (more precisely unrecaptured Section 1250 gain), the tax return is 25 percent plus potentially the 3.8 percent Obamacare tax.

The ways to grind this down:
1. Avoid the 3.8 percent Obamacare tax (discussed here: https://evergreensmallbusiness.com/real-estate-investors-net-investment-income-tax/ )
2. Use a like kind exchange to roll your gain into another real estate investment...
3. Shelter the gain with other deductions (E.g., bigger contributions to employer 401(k))
4. Try to use lower, even zero percent, tax brackets for the gain.

BTW, this is really situation specific, but sometimes folks use an installment sale to spread the gain out over more than one tax return/tax year. (E.g., you sell to your son or daughter, trust their credit, and work the low tax bracket angles.)

DadJokes

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Re: Tax relief?
« Reply #3 on: September 15, 2020, 11:02:11 AM »
You could live in the house for two of the next five years before selling to avoid realizing gains on appreciation up to $250k/$500k (single/MFJ).

That won't help with depreciation recapture, however.

SeattleCPA

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Re: Tax relief?
« Reply #4 on: September 16, 2020, 01:42:37 PM »
You could live in the house for two of the next five years before selling to avoid realizing gains on appreciation up to $250k/$500k (single/MFJ).

That won't help with depreciation recapture, however.

I think that'll only help with the appreciation that happens over the coming two years... not the past, right?

DadJokes

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Re: Tax relief?
« Reply #5 on: September 16, 2020, 02:18:59 PM »
You could live in the house for two of the next five years before selling to avoid realizing gains on appreciation up to $250k/$500k (single/MFJ).

That won't help with depreciation recapture, however.

I think that'll only help with the appreciation that happens over the coming two years... not the past, right?

I'm an auditor, not a tax CPA, so I don't know how that works for a house that was a rental but became a residence, but I haven't seen anything that indicates otherwise.

Quote
Eligibility Step 3—Residence
Determine whether you meet the residence requirement. If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

Enough

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Re: Tax relief?
« Reply #6 on: September 18, 2020, 04:47:33 PM »
I'd be surprised a $100K sale puts you in the top 20 percent capital gains bracket...that's taxable income before the $100K of well over $400K.


you are correct, I should have specified - from my perspective, the 15% is "the high cap gains bracket" haha

I'm an auditor, not a tax CPA, so I don't know how that works for a house that was a rental but became a residence, but I haven't seen anything that indicates otherwise.


ditto that
« Last Edit: September 18, 2020, 04:49:25 PM by Enough »

DadJokes

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Re: Tax relief?
« Reply #7 on: September 19, 2020, 10:05:55 AM »
I did a bit more research on it and see that Congress enacted some restrictions to prevent people from moving into rentals for a couple years to avoid paying taxes on appreciation. Boo.

JoeV914

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Re: Tax relief?
« Reply #8 on: October 06, 2020, 09:11:38 AM »
I have owned a rental property since 2013 and I think it's time to get out of the landlord business.  I think, when we settle up, I will realize about $100k profit.  Is there anything I can do to reduce the tax bill on that $100k?

Just a 1031. Though you’d need to roll what you make into another property. If you want out of RE this wouldn’t be a good option for you.