Capiral Gains basic questions

[Jay Yoo]

Hello

Would the capital gains tax happen on the amount after the mortgage is paid off and subtracted the initial invested fund?

For example, if a property was purchased for $100k and mortgage $70k and invested $10k plus 10k for closing fee, and sold for $110k after one year (I know there is the minimum term and filing jointly variations)

Would Capital gain tax create against $20k for profit left over? Or capital gain towards to the whole $110 amount?

Thank you for your time!

[Joe Splitrock]

@Jay Yoo the mortgage has nothing to do with capital gains. Profit is based on purchase price and sales price. When held as a rental, there is also depreciation recapture that is taxable. My advice is have a tax professional do your taxes to ensure you handle this properly. 

[Ashish Acharya]

Originally posted by @Jay Yoo:

Hello

Would the capital gains tax happen on the amount after the mortgage is paid off and subtracted the initial invested fund?

For example, if a property was purchased for $100k and mortgage $70k and invested $10k plus 10k for closing fee, and sold for $110k after one year (I know there is the minimum term and filing jointly variations)

Would Capital gain tax create against $20k for profit left over? Or capital gain towards to the whole $110 amount?

Thank you for your time!

Loans dont factor in while calculating the gain. So, you would use full 110k. 

[Steve Vaughan]

Originally posted by @Jay Yoo:

Hello

Would the capital gains tax happen on the amount after the mortgage is paid off and subtracted the initial invested fund?

For example, if a property was purchased for $100k and mortgage $70k and invested $10k plus 10k for closing fee, and sold for $110k after one year (I know there is the minimum term and filing jointly variations)

Would Capital gain tax create against $20k for profit left over? Or capital gain towards to the whole $110 amount?

Thank you for your time!

My largest tax bite is usually recapturing allowed or allowable depreciation taken over the years.  How long have you owned it?  

[Jay Yoo]

@Joe Splitrock Thank you Joe! Will contact a cpa

[Jay Yoo]

@Ashish Acharya got it. Thanks for your input

[Jay Yoo]

@Steve Vaughan I owned 13 months. Thanks

[Steve Vaughan]

Originally posted by @Jay Yoo:

@Steve Vaughan I owned 13 months. Thanks

Not bad then.  I sold a 16-yr rental this year.  The recapture amount dwarfed the cap gain. 

[Alexander Szikla]

It is the net selling price (after expenses like broker fees, legal fees, etc.) against your basis (what you purchased it at minus accumulated depreciation over the years). 

If you owned the house for more than 1 year it will be taxed as long term capital gains while less than one year will be taxed as short term capital gains (treated as income). 

Lastly, if this was your primary residence, you may qualify for a capital gains exclusion (no taxes paid on $250,000 of capital gains if single and $500,000 if married if you lived in this property for two of the last five years)

[Michael Plaks]

@Jay Yoo

For starters:

Bought for $100k plus $10k closing fees = $110k "tax basis"
Sold for $110k minus $110k tax basis = $0, as in no gain and no loss.

Now, to complications:

• not sure what you mean by "$10k invested." If it is $10k in repairs, then you tax basis is $120k, and you have an overall loss of $10k using my example above (unless these repairs have been deducted as repairs)
• not all of your $10k closing fees count as tax basis. Some are deducted, and some are ignored. Need to look at each part carefully which calls for a tax professional.
• you also need to subtract closing fees at sale, such as Realtor commission etc.
• there is also depreciation recapture - another complex thing best left for tax pros

Overall, it does not look like you will have capital gains, most likely losses. And it was all in the assumption of this property being a rental property. If this was a flip or your personal residence - then completely different rules.

[Jay Yoo]

@Michael Plaks

Thank you Michael. 
this is just an example for me to understand.  $10k invested means $10k was the downpayment amount when purchased. Non owner living and rental purposes only. 

So basically capital gains will be charged when sold price is higher than the purchase price. No matter how much you invested or how much you have the mortgage to pay off. 
thanks!

[Michael Plaks]

@Jay Yoo

You will be receiving better answers once you get used to more accurate terms in our industry. Call $10k down payment, do not call it "amount invested" which really has no common meaning.

$70k loan + $10k down = $80k, while you needed $100k + $10k closing  = $110k, so something is amiss in your example.

But otherwise you're correct: down payment and mortgage have no meaning for taxable profit. It is the sales price minus the purchase price minus all costs such as closing on both ends. Of course, my formula is very much simplified, there's a lot more details that matter.

[Jay Yoo]

@Michael Plaks

Thanks Michael. So many terms in a very short time from book, hopefully I will get there as well. Thanks!