Will I have to pay a big tax after a sale?

Question

I bought a house, owner finance for 40K last year.

I've been living in the house and redoing it with my own money.

I hope to sell it soon for 100K.

I'll need to pay off the owner finance so I hope to walk out with 60K.

If I take 40K of the 60K and buy another house and keep 20K in reserve to do the repairs, will I have to pay a tax on the 20K?

Bill Exeter · Answer

There are two issues involved here. The first is whether you actually own the property. The second is how you finance the property. In order to qualify for the 121 Exclusion, you must be able to say that you own the property and have lived in the property for two out of the last five years. If you lease the property with an option to buy or rent to own, you technically do not own the property and will not qualify for the 121 Exclusion. If you buy the property and actually own the property, then it will qualify for the 121 Exclusion. The manner in which you finance the property does not matter. So, if you acquire the property with owner financing it will still qualify. Generally, if you acquire the property through a contract for deed or land contract, you are considered to be the owner of the property even though you will not be on legal title.

Cameron Skinner · Answer

your intermingling financing and the cash from sale cash reinvested with your taxable profit. Your taxable profit would be

Sales price

Less Purchase price

Less repairs and improvements

Less closing cost

Equals total profit

If it was primarily held for investment property not personal use, you may also be able to take your carry cost, insurance, interest, property tax ect. This is one of those vague rules IRS looks at total facts and circumstances. You need to hire a good license tax professional in your area not one of those franchise firms, someone with some letters behind their name. I promised they will save you much more in taxes than what they will charge you in fees to set it up the transaction properly to get you the best tax treatment, Hope this helps, good luck!

Richard Fields · Answer

I'm not positive, but I think capital gain tax is 15%

David Soest · Answer

Thank you all for your help.

What is the % I will have to pay?

Kirk R. · Answer

@Bill Exeter Thanks.

Kirk R. · Answer

@Bill Exeter

If I use owner financing and live in the property - My name would not be at the court house.? If I lease optioned or rent to own - while doing this would it count towards the 2 years. If it was a contract for deed would it be different?

Just trying to wrap my head around owner financing scenarios. Thanks for any guidance.

Bill Exeter · Answer

It sounds like you bought the property with the intent to fix it up and then flip it. Properties that are acquired with the intent to rehab and then sell immediately do not qualify for 1031 Exchange treatment. In order to qualify for 1031 Exchange treatment, you must have the intent to hold the property for rental, investment or business use. Properties acquired to rehab and then flip are considered held for sale and not held for investment purposes.

Steve is right on the money. You might want to consider living there for the full two years in order to get the 121 tax free exclusion. The 121 Exclusion is available to those people who own and live in a property as their primary residence for at least two out of the last five years.

You could also decide to move out of the property and hold it as a rental property or at least 12 months in order to qualify for 1031 Exchange treatment. The important point is that you must be able to prove that you had the intent to hold for rental or investment purposes should you get audited.

Steven Hamilton II · Answer

Wayne covered it.You will pay tax on it either way. You can't 1031 your primary residence; however, it would be considered short term capital gain if less than 1 year. I'd aim for the 2 year mark of living there for the Home Sale Exclusion (Code Sec 121).

Hattie Dizmond · Answer

Wait...you could look to do a 1031 Exchange. Read more here...

http://www.investopedia.com/articles/06/section103...

Wayne Brooks · Answer

As your residence, if you hold it for a year you'll probably pay cap gains tax on the profit-net sale proceeds less total cost to buy and rehab. If it were just a flip house, you'd pay ordinary income tax. Reinvesting the money won't defer any taxes.

@Steven Hamilton II will know for sure.

Will I have to pay a big tax after a sale?

Will I have to pay a big tax after a sale?

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