Capital Gains Tax Question
I understand that if you sell a property within one year of purchase that you pay a 28 percent tax on the profit, what is the percentage taxed if the property is held for over one year??
thanks
Robert
so then why take the depreciation?? I know that may sound like a dumb question, but I do appreciate the help.
Assuming you are using the 27.5 year MACRS depreciation, which I think you have to on a residential rental unit, I find (IRS publication 946, last paragraph in Chapter 4; on p.53):
"There is no recapture for residential real property and non-residential real property unless that property is qualified property for which you claimed a special depreciation allowance."
This is one of the beauties of a rental unit- not only do you get cash flow each month, but the depreciation turns that cash flow into a loss- yet when you sell it, you deduct your full purchase price plus improvements from the sale price to figure your profit. One side effect of this, however, is that once you have depreciated your house to zero- after 27.5 years- it is no longer as good an idea to keep it. Most people who hold this long sell at this point and buy an equivalent property so they can continue to take the deduction benefit.
Of course, when you do sell (after holding for over a year) it is indeed taxed heavily. The initial bite out of the profit is the SE tax. As all of us self employed know, the actual SE tax is 14.13%, and half of that tax is deductable, reducing the actual tax somewhat more. This is less than the 15.3 % usually cited because the IRS only actually taxes 92.35% of your SE income. And of course this is just for the first $90,000; after that it is taxed at 2.9%.
The balance after this initial bite, minus half of the bite, is taxed at whatever your tax bracket is. To say what actual percentage the IRS is going to skim off of your profits, you would have to take into account your other income, deductions, etc. as well as how much your profit is.
I do tend to ramble on, but I think my main point here is that the depreciation is NOT recaptured when you sell the property- a very important point when figuring your total profit. Always take those tax benefits into account, especially when trying to convince an investor to go in with you on a deal- sometimes the tax benefits alone (3.636% of purchase price, NOT money invested!)) are enough return for them on a no cash flow property with appreciation potential.
I guess that was a little more than two cents...
Chris
thanks chris. Does everyone agree that this is accurate?
What are the rest of the numbers? ARV, and how much you are paying? What percentage of the ARV are you getting in at?
You may be able to use a HML if the deal is sweet enough.
If youre under 70% of the ARV, then you should be able to get approved with no credit check.
What do you mean by 5 points away? Are you talking about your Fico score? Or closing costs ?
Oh, sorry. Didnt know it was an REO.
write it up as a cash offer
hmm, its a REO? You probaby not going to be able to do much if you dont want to use an investor as a partner.
There really is no way of going around a Pre-Approval letter.
What price ranger are these Alabama properties in? I am not tall on cash but maybe we can work together on a deal.
Is that an article or an ad? Can I afford to get your guide if I have no money?
Chris
What are you doing wrong? Hard to tell. Let me tell you how I work with wholesalers. Maybe there is a parallel here for birddogging.
I have just started working with a wholesaler who brings me rehab deals. I give him between $2500 and $4000 profit for each deal I buy. These properties usually need about $25K to rehab and my purchase price is somewhere between $30K and $45K. The wholesaler gives me a package that includes an "after repair" appraisal and a contractors rehab estimate.
My criteria for properties in this price range is that the property must have at least $25K equity after the rehab is done. I will buy the property, do the rehab, then resell at retail to an owner-occupant.
If your investors are not buying from your leads, perhaps you are not bringing deals with enough profit in them, or you are not giving them enough information to easily assess the deal and decide quickly whether to buy it from you. Perhaps both.
Quote:
Home for $93,900. I may can talk him down to $90,000.
Homes in that area 99,000-102,000.
He claims there are no repairs needed, except for paint. It has a new roof. Should I even go look at this property, or thank him for his time?
Hi Andrea,
I would thank him for his time and move on.
After you subtract any costs for things like…
• Title, Escrow, Closing
• Rehab or Repair
• Holding Cost
• Marketing to resell
• Etc., etc.
…you would be totally upside down on this one.
About the only thing I can think of that might possibly work would be if you could buy it Subject-To, resold it on a Lease-Option, Contract for Deed or Land Contract for about 5%-10% higher than market value, and made a positive cash-flow during the contract term. Even then, it’s pretty slim and doesn’t provide you any alternative ways out.
But if it were me, I would keep looking. The real deals are out there.
Just my 2¢
Thanks everyone! I love this forum because you do everything to help newbies better understand without sugar coating. I will keep looking. At least I got the courage to actually talk to a seller.
From the earlier poster that may work with me in the future, I will keep looking and check on the prices.
Thanks,
Andrea