Lower taxes to the max when selling...depreciation

[Joe Szymczyk]

Hello

Looking at personal house and rentals and depreciation...

I havent sold yet....I have a few rentals that I have been holding....when it comes to sell...how are you guys lowering taxes to the max?

On depreciation...let's say you depreciated a house for 10 years or 27 years...streightline...and you go to sell. How does one get hit by taxes by IRS on this?

If house sells for 300,000 dollars...depreciated on original value bought let's say 100000 dollars...at 27 years....so on year 30....all depreciation is used up...and one sells for 300k....how would the numbers look?

300k minus 100k. Equals 200k in profit....so taxes would be paid on this....then how would depreciation work onthis number?  Maintenance and repairs over 30 years. Do those subtract?  Advertising..property management fees subtract?....

Would like to figure out how to best keep what records I need to help me retain most of that 200k from all the taxes. ....

Can anyone assist?

[Dave Foster]

@Joe Szymczyk in your example you're going to pay tax on all $300K.  Taxes are figured as follows;

Your starting basis (100K) + whatever improvements you made (we don't know these) - depreciation taken or that could have been taken (100k) = your adjusted cost basis (0).

You subtract your adjusted cost basis from the net sales price (300 - 0) and that is your gain.  Your gain is made up of two components - the depreciation recapture - $100K and the capital gain - $200K.   

Tax on the gain would be at 15% fed and whatever VA wants (could be up to 5.75%).

Tax on the depreciation would be at 25%.

The ability to use the deferred tax is huge both as a portfolio builder and a cash flow generator.  In your case you have the option of either paying around $65K to the govt or investing that $65K as part of a 1031 and generating income off that for your benefit.  If you can get 10% return on something that means that just the deferred tax is generating $6,500/year for your benefit all by itself.  Heck that's at least 6 months in Thailand and maybe a year in Guatemala.  And that's why the 1031 is such a key tax mitigating strategy.

If you have several rentals then the idea that keeps the tax dollars working for you is to consolidate those rentals into passive cash producing assets and live off that cash.  Your principle is secure and cash flow continues.  Come home for Christmas once a year.