Capital Gains Taxes?
My question is when do capital gains taxes apply? On first investments or any real estate transaction. Is there a time limit in which you must own the property. thanks for your advise to a new investor
My understanding of it is that if you own the property for 2 years there are no capital gains taxes to worry about. If you're quick turning properties, then capital gains would be a factor.
Be cautious about listening to the message above. It is only barely right.
1st year is short term cap gain. Second year on is a long term cap gain.
If the home is your principle residence for 2 of the last 5 years then you have no tax liability if your gain was 250k or less. 500k if married.
[addsig]
thanks for the gentle let down. I'll stay from tax issues until I understand them better.
The subject of taxation is very long. Give us a particular instance or type of real estate investing (what you plan to do or what you have done) and we'll tell you how you are taxed.
I asked this question in the tax forum and didnt get a straight forward answer, and since it the subject here, maybe someone can tell me for sure. Heres the question:
A seller wants to sell FSBO and bought the house new 3 years ago and its his primary residence. He wants to sell to me, but thinks he has to live in house 5 years so he wont have to pay capital gains tax. He paid cash for the house.
If I can give him verifiable proof, he will sell me my dream home. He is 70, wants to move to his hometown, and get this; hes leaving most the furniture and all the lawn equipment, since he's going to buy a condo.
Any tax attorneys want to call him up for me? lol
Scott
Roughly how much is capital gains tax on an Owner-Occupied property in CA and NV? Is the tax based on the equity after you've sold or the entire sales price of the home?
This is very simple question.
You use schedule D form.
IRS web-site has a great explantion of this schedule.
Try this:
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Capital Gains taxes are always a factor in any real estate sale.
If the home is your primary residence and you have lived there for 2 years of the last 5, than you don't have to pay them.
Quote:
I asked this question in the tax forum and didnt get a straight forward answer, and since it the subject here, maybe someone can tell me for sure.Scott,
Let's review the thread again where you asked your original question. Please tell me why you think you did not get a straightforward answer? After I spent so much time with you in a board dialogue, I am puzzled why you believe our discussion was not productive.
http://www.thecreativeinvestor.com/ViewTopic19455-23.html
Quote:jonathanlawton wrote:
My question is when do capital gains taxes apply? On first investments or any real estate transaction. Is there a time limit in which you must own the property. thanks for your advise to a new investor
I must reinforce the admonishment you have already received about taking tax advice from a forum such as this. Usually when I get the chance, I ask you some questions to clarify your context before giving an answer. Without knowing why you are asking, I can not be sure that my response is accurate for your circumstances. Because myfrogger already requested more detail behind your question, there was no need for me to ask again.
For example,jeff1202 gave you a half correct reponse that only applies to owner occupied property. His response could be incorrect in certain circumstances.
nlsecor also gave you correct information that applies to investment property but only partially correct for owner-occupied property. If you are asking about quick flips, contract assignments, and potentially lease option deals, then the information you received is not applicable.
TANISGroupLLC also attempted a response, but once again there are circumstances with regard to owner-occupied property that would make this response invalid.
jonathanlawton, please come back to this forum and answer the question myfrogger asked. I would like an opportunity to assist you too.
DaveT,
Im sorry if I construed the wrong signals int hat post, what I was trying to state was that I still had not grasped the idea of whether the person had to be in the house for 5 years. I understand now. Im sorry if I made it seem that the information you gave me was all for not, it was not.
sincerest appologies.
Scott
sorry it took so long to reply. As for the question that myfrogger asked me.
I have just started to purchase rental properties. I buy fixers and have made a lot of equity in the two that I own. I owe 63000 on one and 43000 on the other, and they are worth 85000 and 80000 respectfully. I have owned them both for less than six months. Thanks for your help.
jonathanlawton,
Do you have any other rental property?
For these two properties you describe, have you placed them in service as rentals yet, OR, have you just finished the rehab and now want to market the properties for resale?
One of the houses is currently used as a rental and the other house is in the middle of the rehab. I am debating whether to flip it (almost 40000 worth of equity on a 80000 dollar house) or rent it out. Capital gains taxes will play a big role in my decision. These are the only properties that i currently own. thanks for your help
Owner occupied property for 2 of the previous 5 years you can sell and enjoy the capital gains tax free. Up to the limits stated above.
For the FSBO question, if he has lived there two of the previous five years then he will not have to pay capital gains tax.
As for the rehab, first in order to receive capital gains tax it first has to be a "capital asset." Buying a property to rehab and then flip will not qualify for capital gains treatment. It will be inventory and the gain will be ordinary income.
Quote:One of the houses is currently used as a rental and the other house is in the middle of the rehab. I am debating whether to flip it (almost 40000 worth of equity on a 80000 dollar house) or rent it out. Capital gains taxes will play a big role in my decision. These are the only properties that i currently own. thanks for your helpjonathanlawton,
Since the first house is in service as a rental, I suggest you hold onto this property at least one year to qualify for the long term capital gains tax rate. If you have a one year lease in effect, it will not be too much trouble to wait until your tenant's lease expires before you sell the property.
Instead of just "selling" the property to collect your long term capital gains, consider using a Section 1031 tax-deferred exchange to acquire another investment property as a replacement for this one and defer your capital gains indefinitely. Purchase another rehab and put it into service as a rental. Repeat this process every couple of years, to build wealth and equity tax free.
For the second property, you also have options. Since it appears that your primary real estate activity is rental property -- a passive income activity -- I would think you could report a sale of your second property as a short term capital gain on your Schedule D. The tax on your profit will be at the same rate as your other ordinary income, but you won't have self-employment tax issues to deal with.
I caution, however, that if you intend to purchase rehabs to flip, you will be engaged in an active real estate business. If this is what you want to do, then form a business entity for this activity. Let the business entity provide a tax firewall between your rental property holdings and your rehab business.
If you establish a pattern of activity that the IRS determines to be a dealer activity, then the IRS will recharacterize all your past sales as dealer dispositions and recompute your taxes accordingly (with penalties, interest, and back taxes adding up to quite a bill). Using a business entity to keep your rental property activity and the sale of your rental property segregated from your rehab business, will prevent your rehab flips from tainting an otherwise legitimate capital gains tax treatment on your rental property sales.
I normally tell the visitors to this forum who have no other real estate activity, and, who want to rehab and flip property for the quick profits, that their activity is a dealer disposition. Dealer disposition profits are taxed as ordinary income (same as short term capital gains) and have other restrictions on the tax treatment for your exit strategy, as well as, bring self-employment taxes into the picture. It only takes one flip, to be engaged in a dealer activity.
If you are serious about accumulating rental property as a long term wealth building strategy, why not complete the rehab on your second property and put it in service as a rental generating a positive cash flow. If you need cash out of your equity for your next rehab acquisition, do a cash out refinance on your investment rental property.[ Edited by DaveT on Date 01/17/2004 ]
I have had several questions with regard to taxes on sale of realestate -- Before posting them however I went through and read the strings. WAHLAH! My questions were answered without having to ask the same questions over and over.. -- Thanks to all who have contributed responses to questions asked!