All Forum Posts by: Scott Lewis

Okay, BP community, I have a tax question and would appreciate any help you can provide.

I'm looking to sell my 50% ownership in an LLC to the partner who owns the other 50%. The LLC owns one small apartment building, which it's held for over 5 years, and no other assets except a checking account. My partner and I have different visions of where we want to go. He plans to sell the property and do a 1031 later in the year. I realize selling my share of the LLC is a taxable event for me, but there are reasons I don't want to do a 1031 exchange. I want to be sure I have a rough idea of the taxes I would be paying before I proceed with this since I don't know how the sale of part of an LLC works. I plan to talk with a CPA, but want to get feedback from the community.

If I sell my entire 50% stake, are my taxes calculated as if I sold the building with regards to depreciation recapture, etc. or are my taxes are calculated differently?

These aren't the actual numbers, but an example with some round numbers, so the depreciation values are not real, either.

Purchase price: 300K

Land value: 30K

Building value (270K) + closing costs at purchase (10K): 280K cost basis, 230K adjusted basis, 50K depreciation

Improvements over a few years: 50K cost basis, 30K adjusted basis, 20K depreciation

Intangibles (financing fees): 8K cost basis, 2K adjusted basis, 6K amortization

Total depreciation + amortization as of the end of 2021: 76K

I own 50% of the LLC, so the above items would be multiplied by 50% to calculate my share.

If I sell my 50% share for 210K, here are my calculations. Please let me know if this looks off.

Federal capital gains tax. My long-term capital gain would be 26K = 50% * (420K - 280K - 30K - 50K - 8K). At a 15% capital gains rate, that's 3.9K in taxes.

Federal depreciation recapture. Depreciation (+amortization) recapture would be 38K = 50% * (50K + 20K + 6K). At a maximum depreciation recapture of 25%, that's 9.5K in taxes. Is the maximum depreciation recapture rate still 25%?

Federal Net Investment Income Tax (if applicable based on my and my wife's total income) of 3.8% on the entire gain of 64K (26K + 38K), which is 2.4K.

DE state tax of 6.6% on the entire gain of 64K, which is 4.2K.

That brings my total tax bill to 20K.

Would I have to pay any taxes at my regular income tax rate at the federal level?

If I sell on June 1, will I factor in deprecation for the first 5 months of the year? How will that affect my partner's basis, etc.?

If you have any recommendations on a CPA I should call for a consultation around this specific issue, I'm open to suggestion.

Thanks in advance for your help and have a good day!

@Shawn Kostoff, thanks for the recommendations!

Hello, BP community! I'm looking for a structural engineer to do an evaluation of the foundation of a single family residence in the Wilmington / New Castle County, DE area. Specifically, someone who has experience with foundation settling and bowing in cinder block wall basements. 

I appreciate any recommendations you can provide. Thanks in advance and have a good day!

I'll be there for part of it assuming the babies cooperate, haha. Thanks for setting it up, @James Masotti!

Fellow BP Members,

Recently, there were four community meetings to discuss proposed housing code legislation in WIlmington, DE. Unfortunately, I was not able to attend, but am wondering if any of you were and what sort of feedback you heard. These changes are well-meaning, some good and some not so good in my view, with the not so good resulting in increased costs for "good" rental property owners. I've pasted a list of the proposed changes below as well as the website. 

What do you think about these proposed changes? Have a good day.

Mayor Purzycki Schedules Two Additional Community Meetings on Proposed Housing Code Legislation to Preserve City Neighborhoods

• "The new ordinance to amend Chapters 4, 5 and 34 of the City Code would:
  
  Change enforcement of the housing code with respect to vacant and rental properties from criminal enforcement to civil enforcement with civil fines for non-compliance.
  Establish a target goal of 1,500 rental properties to be inspected annually by L&I and require that all rental dwellings be inspected every three years instead of every two or five years. If no violations are found during a rental inspection, the L&I Commissioner may delay the next required rental inspection one additional year from three years to four years.
  Change the fee assessed for a second rental re-inspection from $25 to $125.
  Add language reiterating that regular rental inspections are a condition of a City rental business license.
  Add a civil fine of $500 per rental unit for failure to register/obtain a rental business license.
  Add a civil fine of $250 for each violation of the housing code if the violation relates to a rental property or a vacant property. Each week’s failure to comply is a separate offense subject to an additional $250 fine. There is no change to the criminal fine structure for all other types of property, except that the new law would change “each day’s failure to comply may result in an additional fine” to “each week’s failure to comply may result in a separate offense.”
  Increase the business license fee for rental properties to $100 per unit, not to exceed a total business license fee of $10,120. It would increase the fee from the current formula which is $50 (for one or two units) or $120 (for three or more units) plus $10 per unit.
  Amend the vacant property registration fee program to: (1) increase the registration fees for properties that are vacant three or more years; (2) require registration of buildings vacant for six consecutive months rather than 45 consecutive days; (3) impose a civil fine of $500 for failing to register a vacant building within 30 days of the required time to register; (4) exempt vacant buildings owned by the Wilmington Neighborhood Conservancy Land Bank Corporation (“Land Bank”) from registration requirements; (5) provide that purchasers of a vacant building from the Land Bank be billed a vacant registration fee based on the duration of vacancy from the time he or she received the building from the Land Bank, rather than a vacant registration fee based on the complete duration of the vacancy prior to that new owner receiving the building; (6) provide for a vacant registration fee abatement program.
  Change the minimum amount of time citizens have to correct a code violation from 45 days to 30 days, unless a shorter time period is required to protect public safety. Dwellings that are unfit for human habitation are provided only three days to comply.
  Change the requirement that the City mail notice to the “last known address,” to instead, the property address and the tax address, and provide that the time notification period begins to run on the earlier of: five business days from the date of mailing; the date of actual delivery; or the date the notice is posted.
  Change the appeal fee charged to citizens who choose to challenge a citation from a non-refundable $50 to a refundable fee if the appeal is successful.
  Change the time in which a person may appeal a citation from 10 business days to 20 calendar days.
  Amend the code to require distribution of housing and rental program information by the City to owner occupants and tenants during all inspections.
  Amend the code to require quarterly reports to City Council providing the results of rental inspections and other information the L&I Commissioner determines should be included."

@Eric Luzier, welcome to the BP community! The BP podcast episode with @James Masotti is really good, he's just being modest :-). Best of luck!

Welcome to the BP community, @Bryan Fean! You're in the right place to learn more about real estate investing.

Welcome to BiggerPockets, @Brian Ward! You'll find a wealth of information on the site. Happy investing!

Fellow BP members and real estate investors,

I’m interested your opinions on what typical cap rate (ranges, medians, or both) are for class A, B, C, and D property locations (and corresponding building quality for the sake of simplicity) in Wilmington, Delaware. The only information I’ve found online so far is for Philadelphia, which is understandable given its size, but I know it’s much different from Wilmington. One interesting aspect of cap rates is that real estate investors, as a whole, determine these cap rates, so we all contribute to the cap rates in our target investment areas. Just a thought.

When I run the numbers on a property, I tend to be on the conservative side, so I am (hopefully) coming up with cap rates on the low side. Your thoughts on any type of property would be useful, especially small multifamily properties. Thanks in advance.

- Scott

I let the property management company take care of it instead of trying to do it myself, but there are benefits of both. The benefits I found with letting the PM company do it are as follows:

- They have experience and (should) know what they are doing

- I was able to learn from the PM company. Beforehand, we sat down and discussed the terms of the agreement, tenant screening, etc. After things were up and running, we kept in touch so I was able to follow the steps they were taking. We had more discussions on what tenant applications they were seeing, what made some better than others, how many replies they were getting to the listings, and how many people were actually showing up to view the units. After I got the hang of it and spent more time on BP, I did provide input on how to make some of the listings more appealing to potential tenants. 

- I was able to spend my time doing other things.

As others are saying, it's typically a commission of the first month's rent. Enjoy!

Scott