To Sell a rental property?

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Submitted by JBurkett19 on April 26, 2011 - 8:42am

I have a rental property that I used to live in, but moved out in March of 2009. I think that I qulaify for the exemption from Capital Gains because I lived in it two of the last five years. After this year, I will not qualify for the Cap. Gains exemtion, so I was wondering if anyone had an opinion on whether or not I should sell to avoid the Cap. Gains. Also, if I'm to pay Cap. Gains, am I also on the hook for income tax on any gains?

General back ground is: I have a monthly cash flow of about $150 per month after expenses (including Mort./ Prop tax./ Ins./ Income Tax and savings for repairs). The house has recently become vacant and I'm prepping it for re-rental, but wanted to confront this question now.

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It depends. How much would
Submitted by FormerSanDiegan on April 26, 2011 - 10:44am.

It depends.

How much would you realize from the sale ?

How much would be taxable if you weren't eligible for some tax-free gain ? (you need to know your adjusted cost basis)

How much (approximately) is the property worth and how much rent do you charge ?

What would be your plans for the proceeds ?

I used to be a 1031
Submitted by urbanrealtor on April 26, 2011 - 10:58am.

I used to be a 1031 consultant for Prudential 1031 (aka 1031 Exchange Advantage).

I don't know the answer to your question.
If I were you, I would speak with a 1031 person because the laws changed on this topic in the last couple of years.
If you talk to a CPA or EA, make sure they have very complete and up to date knowledge regarding 121 exemptions vs 1031 exemptions.
It has been my experience that most tax pros do not.

Also, look up on line about 121 exemptions.

Good luck.

UR is correct, the laws did
Submitted by FormerSanDiegan on April 26, 2011 - 11:43am.

UR is correct, the laws did change. A portion of your gain will be tax-free, but a prorated portion will be taxable, depending on the period used as a rental.

The portion of the profit that’s subject to tax is based on the ratio of the time after 31 December 2008 when the house was a second home or a rental unit, to the total time you owned it.

Also, it may have to be your primary residence when you sell it (e.g. you move back in).

Take UR's recommendation. Consult a tax advisor, but don;t take their word for it. Research it yourself also. But there's lots of stale info on the web that does not account for recent tax law changes. Confirm any advice with IRS publications.

The rent is $1550 per month.
Submitted by JBurkett19 on April 26, 2011 - 12:49pm.

The rent is $1550 per month. After all expenses, including income tax, I take home about $150 per month.

I plan to either refi. my current house and use teh proceeds toward it, or just invest it in something relatively conservative.

Before any Cap. Gains or income tax, I'd realize about $100k, but around $60k would be the difference between original purchase price and sale price. I think this would be the amount taxable.

So ballpark 80k after taxes.
Submitted by EJ on April 26, 2011 - 1:20pm.

So ballpark 80k after taxes. Annual income of ~1.8k.

1.8/80 = 2.25%

If you assume no appreciation or depreciation on the house (fair assumption for next few years I think), then if you can find an investment with a low-risk return greater than 2.25%, your money is better off there.

Just another way to look at it ...

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