How do Taxes work Selling an Investment Property?

Question

Hi Guys,

quick question. So I'm looking to sell a condo I've only had for about 10 months. Going to use some numbers for examples with my questions at the end

100k purchase price 20% down 80k equity in it
closing costs for purchase were 5k
10k in Capital Additions
While working on the property it was vacant and therefore there were "losses" through tax, insurance, utilities, mortgage, etc.
lets say there was about 5k in losses through monthly payments (8 months worth)
lets say I've also spent about 5k in maintenance

breakdown of cash in the deal is

Downpayment: -20k
Additions- -10k
Closing Costs: -5k
Total "Loss"- 5k

Maintenance- 5k

If I were to sell the house for $125k, Do I have to pay a capital gains tax (on the +25k) even if my total cash in on the condo is the same as the sale price? If so do I claim the other losses, maintenance, etc on my personal tax returns?

I would really like to just call it an even sale and not pay capital tax and also not have to report any losses on my taxes

Linda Weygant · Answer

Essentially, you will need to separate out the "rental income and expenses" from the sale of the property.

So you have a purchase of a house - That starts as your original Basis of the property.

You then have a bunch of remodeling expenses in order to get the house rent ready.  This increases your Basis in the house.

You then rented it for a couple of months and had cash flow of $800.  I'm going to treat that like your profit, but it may not be because, as others have said, your cash flow is not necessarily your profit, particularly where you have a mortgage.

So you'll report your rental income and rental expenses (these are only expenses AFTER you put the property into service - ie, it was rent ready) on Schedule E.

You will then figure your gain on the sale as follows:

Sale Price minus (Purchase Price + Remodeling Costs)

It's a fairly complicated process to separate out what is deductible in the current year as a rental expense and what needs to be included in Basis and which expenses you might have had that are a grey area and could go either way.

I'd suggest that you have your taxes done by a CPA who is very knowledgeable in rental income issues because it seems like your learning curve on this is very steep and, ultimately, may not be entirely complete once it is time to file your taxes.

Dave Toelkes · Answer

So, you bought a rental property and spent eight months making the proeprty ready to rent.  You now have had a tenant in place for the past two months.  You have a positive cash flow of $400 per month.

I don't see the problem. If you have a positive cash flow and there are no problems with the property or the tenant, why do you want to sell so soon after spending so much time and money making the property rent ready?

Perhaps you are just impatient, though you don't explain why it took eight months to put the property into service.  if you sell to an investor, you probably won't get enough to breakeven, even if a real estate agent commission is not a factor in the deal.  If you sell to an owner-occupant buyer, how much willl it cost you to relocate your tenant?

BTW, your mortgage payment is not deductible nor included in the cost basis.  You can take a deduction for mortgage interest, but not for the loan principal payment and not for insurance and tax escrows.

Rental property ownership is NOT a quick road to riches.  If you were expecting otherwise, perhaps you would be better suited to another investment strategy.

Carl Fischer · Answer

@David Zheng

If you really want to learn Fill out a tax return on schedule E or C if this is hypothetical. Long term capital gains (after a year in service) can be significantly different than short  term capital gains(ordinary income rate). Also talk to your cpa or at least try tax return software interviews.

@Linda Weygant provided a great summary and this can get complicated but you just need the concept and salient points so you make good decisions and leave the details to the professionals CPA's. You can't do it all.

David Zheng · Answer

@Dave Toelkes Sorry I should have clarified more clearly these are all example numbers and timelines. I'm mostly wanting to learn how to get this sale taxes. I did not know that insurance and taxes/month cannot be counted as a deduction from the sales price so that helps a lot.

David Zheng · Answer

@Linda Weygant@Natalie KolodijIt was intended to be a long term rental for me, but Now I want to move into other projects so I want to sell it. " Example"Currently rented out cashflowing 400/month but I've only seen two months of this profit with the previous 8 months vacant. So I guess what I'm hearing is if I sell it for 125k and had bought it for 100k, I would be taxed on the 25k+ profit even if I've had losses/ additions?

Natalie Kolodij · Answer

Cash is really not what will matter here, as @Linda Weygant mentioned the intent of the property, basis, and sales price ultimately do

Linda Weygant · Answer

Was this a flip or a rental?  The answer to your question varies drastically depending on what your intent was with this property.

Barbara Esmedina · Answer

With Trump's tax plan being unveiled today, you might want to wait. It will affect some common real estate deductions (not for the better) and if you are using an LLC or pass-though entity those taxes will also be affected. Right now 86% of small businesses already pay 25% or less on pass-though income. If you were a small business paying less you will be paying the mandatory 25%. I am hoping some of the excellent CPAs, such as Amanda Han (get her excellent book "The Book on Tax Strategies for the Savvy Real Estate Investor" if you don't have it already) post articles on the new tax plan after it is revealed today. Having a tax strategy before you sell is key. Wait and consult a good RE CPA before you make a move.

How do Taxes work Selling an Investment Property?

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