Author Topic: 25% capital gains tax from selling investment property  (Read 1463 times)

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Offline lovingit

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25% capital gains tax from selling investment property
« on: May 21, 2022, 12:26:12 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

Offline CalBears96

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Re: 25% capital gains tax from selling investment property
« Reply #1 on: May 21, 2022, 12:43:38 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

First of all, the profit is the final proceeds after all realtor fees minus the total cost of the house when you bought it. It has nothing to do with how much you left on your loan.

And the real estate capital tax gains is either 15% or 20%, depending on your tax bracket, if you had owned the house more than one year since it will be considered long-term capital gains.

Offline nosuchreality

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Re: 25% capital gains tax from selling investment property
« Reply #2 on: May 21, 2022, 12:45:30 PM »
Your loan balance matters not.

What matters is your purchase price, plus capital improvements that you’ve documented, minus the depreciated value of the property and sale costs and then if you are pocketing the proceeds or doing a 1031 type exchange.

You have been depreciating the asset on your schedule e?

Offline USCTrojanCPA

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Re: 25% capital gains tax from selling investment property
« Reply #3 on: May 21, 2022, 01:14:43 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

First of all, the profit is the final proceeds after all realtor fees minus the total cost of the house when you bought it. It has nothing to do with how much you left on your loan.

And the real estate capital tax gains is either 15% or 20%, depending on your tax bracket, if you had owned the house more than one year since it will be considered long-term capital gains.

Plus add in the California marginal tax rate plus the 3.8% investment tax if your income is over a certain amount.
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Offline lovingit

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Re: 25% capital gains tax from selling investment property
« Reply #4 on: May 21, 2022, 04:19:18 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

First of all, the profit is the final proceeds after all realtor fees minus the total cost of the house when you bought it. It has nothing to do with how much you left on your loan.

And the real estate capital tax gains is either 15% or 20%, depending on your tax bracket, if you had owned the house more than one year since it will be considered long-term capital gains.

The original loan matter because the proceeds will have to pay back what I own.  Let’s say I bought it for $500k, the delta is still $1m minus $500k = $500k.  I still owe $400k on the loan so that has to be paid back.

So 20% is still a big check I need to write.

Offline lovingit

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Re: 25% capital gains tax from selling investment property
« Reply #5 on: May 21, 2022, 04:22:21 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

First of all, the profit is the final proceeds after all realtor fees minus the total cost of the house when you bought it. It has nothing to do with how much you left on your loan.

And the real estate capital tax gains is either 15% or 20%, depending on your tax bracket, if you had owned the house more than one year since it will be considered long-term capital gains.

The original loan matter because the proceeds will have to pay back what I own, the principal balance.  Let’s say I bought it for $500k, the delta is still $1m minus $500k = $500k.  I still owe $400k on the loan so that has to be paid back.

So 20% is still a big check I need to write.

Offline irvineboy

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Re: 25% capital gains tax from selling investment property
« Reply #6 on: May 21, 2022, 04:28:31 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

First of all, the profit is the final proceeds after all realtor fees minus the total cost of the house when you bought it. It has nothing to do with how much you left on your loan.

And the real estate capital tax gains is either 15% or 20%, depending on your tax bracket, if you had owned the house more than one year since it will be considered long-term capital gains.

This is incorrect.  I looked at my Final Settlement Statement when I sold my primary house.  They took the proceeds from the sale price, minus my principal balance (my loan) and realtor commissions and other escrow and title charges.  Nothing on the settlement statement showed the price of what I originally paid for the house.  So yeah, you have to subtract out your original loan to pay off what you still owe the bank. 

But I have never sold an investment home.  I think if you made $500k after all fees, do you have to pay 20% x $500k or $100k as capital gains?  That’s a huge check to write. 

Offline someguy

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Re: 25% capital gains tax from selling investment property
« Reply #7 on: May 21, 2022, 05:17:25 PM »
Purchase Price
+ Improvements
- Depreciation taken (if applicable)
-------
Basis


Sale price
- Selling Costs (Broker fees, title, escrow, etc)
- Basis
-------
Preliminary gain/(loss)


Preliminary gain/(loss)
- Primary residence exclusion (if applicable)
-------
Taxable Gain*


* Recaptured depreciation is taxed at ordinary federal income tax rates, up to a maximum of 25%
* Federal gain beyond depreciation recapture may be eligible for capital gain rates
* Federal Net investment income tax (3.8%) may apply if income is above a certain threshold
* California does not recognize favorable capital gain tax rates, thus all taxable gain is taxed at ordinary rates
« Last Edit: May 21, 2022, 05:29:04 PM by someguy »

Offline CalBears96

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Re: 25% capital gains tax from selling investment property
« Reply #8 on: May 21, 2022, 05:30:01 PM »
Let’s say I sell a $1m property after realtor fees.  Let’s say I have $400k left on the loan.  Since it’s investment home, there are no exemptions from living there 2 out of the last 5 years.  Does that mean I will have to pay 25% * $600k profit = $150k to the IRS?  Like I would actually have to write a check for $150k due to this $600k profit?

First of all, the profit is the final proceeds after all realtor fees minus the total cost of the house when you bought it. It has nothing to do with how much you left on your loan.

And the real estate capital tax gains is either 15% or 20%, depending on your tax bracket, if you had owned the house more than one year since it will be considered long-term capital gains.

This is incorrect.  I looked at my Final Settlement Statement when I sold my primary house.  They took the proceeds from the sale price, minus my principal balance (my loan) and realtor commissions and other escrow and title charges.  Nothing on the settlement statement showed the price of what I originally paid for the house.  So yeah, you have to subtract out your original loan to pay off what you still owe the bank. 

But I have never sold an investment home.  I think if you made $500k after all fees, do you have to pay 20% x $500k or $100k as capital gains?  That’s a huge check to write.

The original loan matter because the proceeds will have to pay back what I own.  Let’s say I bought it for $500k, the delta is still $1m minus $500k = $500k.  I still owe $400k on the loan so that has to be paid back.

So 20% is still a big check I need to write.

The two of you are confused.  Once again, the loan DOES NOT matter one bit. The amount you pay back to the bank has absolutely nothing to do with the gain on the house. The gain on the house is how much you sell for (after calculating all the fees) minus how much you paid for (plus any improvement costs). This is a very simple concept.

@irvineboy, are you thinking how much you get back after selling the house and paying off the loan? That's not a gain. That's just how much money you pocket.

someguy summarized it correctly.

Offline AW

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Re: 25% capital gains tax from selling investment property
« Reply #9 on: May 21, 2022, 05:41:06 PM »
Correct me if I’m wrong, if you don’t truly need the money now, and want to pass on wealth anyways, one way to avoid gains and pay back depreciation is if you bequeath it, the beneficiary will have the basis reset at date of death, same with the depreciation?

Offline USCTrojanCPA

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Re: 25% capital gains tax from selling investment property
« Reply #10 on: May 21, 2022, 09:12:40 PM »
Correct me if I’m wrong, if you don’t truly need the money now, and want to pass on wealth anyways, one way to avoid gains and pay back depreciation is if you bequeath it, the beneficiary will have the basis reset at date of death, same with the depreciation?

Or do a 1031 exchange.
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Offline CalBears96

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Re: 25% capital gains tax from selling investment property
« Reply #11 on: May 21, 2022, 09:24:18 PM »
Correct me if I’m wrong, if you don’t truly need the money now, and want to pass on wealth anyways, one way to avoid gains and pay back depreciation is if you bequeath it, the beneficiary will have the basis reset at date of death, same with the depreciation?

Or do a 1031 exchange.

But you would need to buy another property in order to use the 1031 exchange.

Offline USCTrojanCPA

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Re: 25% capital gains tax from selling investment property
« Reply #12 on: May 21, 2022, 10:05:09 PM »
Correct me if I’m wrong, if you don’t truly need the money now, and want to pass on wealth anyways, one way to avoid gains and pay back depreciation is if you bequeath it, the beneficiary will have the basis reset at date of death, same with the depreciation?

Or do a 1031 exchange.

But you would need to buy another property in order to use the 1031 exchange.

Yes but the entire tax can be deferred.
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Offline sleepy5136

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Re: 25% capital gains tax from selling investment property
« Reply #13 on: May 22, 2022, 01:19:40 AM »
Correct me if I’m wrong, if you don’t truly need the money now, and want to pass on wealth anyways, one way to avoid gains and pay back depreciation is if you bequeath it, the beneficiary will have the basis reset at date of death, same with the depreciation?

Or do a 1031 exchange.

But you would need to buy another property in order to use the 1031 exchange.
and you only have 6 months to find a replacement and close on it.

Offline Cares

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Re: 25% capital gains tax from selling investment property
« Reply #14 on: May 22, 2022, 12:45:15 PM »
The loan balance does not matter when it come to calculating capital gains. You just need to know your cost basis, improvements, and depreciation amount for depreciation recapture.

 

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