Capital gains with intention to rent?

Question

Hello BP,

So here is my situation:

I bought a REO in January 2019 with the intention of renting it out for a little over a year and then selling it. Long story short, my tenants only lasted from February till June and then bailed on me. If I sell the house in 2019, will I pay capital gains tax or will the proceeds be treated like regular (W2) income? My CPA is telling me that it will treated as short-term capital gains but I’m wanting to get a second opinion.

Thanks for looking and contributing!

Mike Miller · Answer

@Elliott Elkhoury

Thanks for your input!

Account Closed · Answer

@Mike Miller you've got to own the property for over 1 year to pay long term cap gains tax, in addition to the property being classified as a rental on your taxes. If you've sold the property within less than a year of ownership, you're going to pay ordinary income tax on the net gain.

Mike Miller · Answer

@Ashish Acharya

Thank you very much for that input!

Ashish Acharya · Answer

Yes if the intent is to rent this, not a flip, the gain is cap gain ( short term or long term depending on your holding period). If it’s a cap gain, no SE taxes.

Mike Miller · Answer

@Ashish Acharya

Thanks for your answers!

I think I’m still kinda confused about this so you or somebody else might need to dumb it down for me.

Since I intended to rent the SFR for a year before selling it, does this qualify me for long term capital gains treatment? (Without self-employment tax?)

What if I shortened the sale to within less than a year after purchasing it? (Still renting it for five months or so.)

My intent was to make it a income producing property before selling it. The variable here is time.

Thanks to you and all who viewed this..

Ashish Acharya · Answer

Not the self employment income. Regular W2 income. The Self employment income will pay extra 15.3%.

Mike Miller · Answer

@Ashish Acharya

Ok, so just to see if I’m understanding you,

you’re saying that short term capital gains and regular income tax with self employment tax would both be about the same amount?

Ashish Acharya · Answer

The short term capital gain is taxed at the same rate as ordinary rate. So unless you have other capital loss  that can offset this capital gain (because cap loss are limited to 3k deductibility) or subject to NIIT tax, you should be in the same position, generally.