All Forum Posts by: Carmen Ngai

@Frank Chin @Bob Norton

Thanks so much!  Those are all useful information.  I am glad the loss can be used later for the "rainy days" (when I am actually making money).  

Yes!  I forgot to add the depreciation recapture in my scenario #2 calculation.   The structure costed $200,000, so the math should be:

Realized gain will be $2,000,000 - $300,000 = $1,700,000

Long term capital gain tax will be $1,500,000 x 20% = $300,000

Depreciation recapture: $200,000 X 25% = 50,000

Total tax due: $350,000

Am I right?  

@Bob Norton

Hi Everyone, 

I am just starting out and looking for a rental property.  So, I have lots of questions, especially about depreciation.   I'd like to evaluate how it affects the tax consequence when I sell it some day.  From what I read, only the structure/building is depreciable. Land does not depreciate. It assumes in 27.5 years the structure is completely depreciated and worth $0. I ignore the closing cost and upgrade for simplicity sake at this point.  

Here are 2 hypothetical situations:

1.  Condo $500,000

If I buy a condo for $500,000, assume in 27.5 years I sell it for 2,000,000. 

Since only the structure itself can be depreciated.  For Condo, you don't own land.  So, from the accounting stand point, the condo after 27.5 years worth $0.  The cost basis will be $0.  

Realized gain will be $2,000,000

The part that is tied to the depreciation deduction is $500K the tax rate will be 25% (ordinary income tax rate).  $500,000 x 25% = $125,000

The rest of the gain will be taxed as long term capital gain, so, $1,500,000 x 20%, which is $300,000

Total tax due:  $425,000

2. Townhouse $500,000, sell in 27.5 years for $2,000,000.

Since the townhouse is sitting on a little piece of land, I assume a portion of the townhouse cost is land.  Lets assume the townhouse structure itself costs $200,000, $300,000 is the land.  After 27.5 years, the $200,000 structure is completely depreciated to $0.  The cost basis for this townhouse will be $300,000

Realized gain will be $2,000,000 - $300,000 = $1,700,000

Long term capital gain tax will be $1,700,00 x 20% = $340,000

Is my calculation correct?

The IRS said the whole “allowable depreciation amount” would be recaptured. What does “allowable depreciation amount” mean? Does it mean based on the accounting principals how much the property has depreciated? So, in the above case of the condo, then the allowable depreciation amount would be $500,000?  I understand IRS does not want taxes uncaptured when someone makes a profit.  Because of depreciation, a lot of the time the rental property by the book has a rental loss, which the landlord can use the rental loss allowance up to $25,000 to offset the regular income, so, it is kind of fair to recapture the income tax of that $500,000.  

But what if I am not eligible to use any capital loss allowance to offset my regular income, that means I couldn't take full advantage of depreciation, will the condo allowed depreciation amount still be $500,000?  

I imagine at the beginning with mortgage interest, depreciation...etc, from taxation stand point there would be a rental loss.  If I cannot use that to offset my regular income, can those losses be carried over to offset my gains in the later years?  
 

Any guidance is welcome! 

Thanks

Carmen

  

Hello @Eric Fernwood, 

Thank you so much for your insights.  Those are very informative especially for a 1st time real estate investor. I felt like I just read a book on real estate investment in 10 mins.  The time lapses site you mentioned is fascinating by the way.     

I live in Vancouver.  The property price in the city area have become so expensive.  I will try to find something locally first, likely somewhere that is close enough to Vancouver which is more affordable and within the commuting distance.  It is a coastal city, also surrounded by mountains, those are state land, so, the urban sprawling issue would be limited I think.  I will do more spreadsheet exercise and keep those 3 criteria in mind.  If the spreadsheet number doesn't work, I would have to look elsewhere.  

Carmen 

Hi there,

I am a newbie here. I have been investing in the stock market for years. Now I'd like to diversify my investment by getting into real estate, starting small, likely a 1-2 bedroom condo or townhouse and rent it out. I'd like to get some insights from the seasoned investors about your experience investing locally vs remotely. What are some of your biggest challenges?

If it is a city which you think it has growth potential, such as North Virginia Arlington area since Amazon is going there and their shortage in homes, would you feel it is justifiable to jump through extra hoops to buy remotely?    

Thank you. 

Carmen

 

Thank you for your insight.  It sounds like there is no gain on the buyer side for not having an agent. 

I am looking into buying a pre-construction condo as an investment in Arlington Virginia.  Do I need an agent?  If I should, it seems like the developer has a designated real estate company to handle the sale.  Do I have to go with that particular one?