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Selling 2nd Property - Top tax bracket.

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  • Selling 2nd Property - Top tax bracket.

    I am an infrequent visitor of this website. But I have advised many people review this website. I would welcome any comments on the following situation:
    This is a two physician household. Have been renting one of the properties in a small town which we bought in 2014( during the first Job ). Lived in it for 2 1/2 years and have been renting it since 2017. Could not sell it in 2014 because there was no takers. This is a small town maybe 30,000 in population in rural area. I have been to this town in the past summer and there has been no significant development compared to the place that I currently live in which is a moderate size down which has seen a significant growth in real estate properties. Currently the house that is being rented has gone up in value from 258,000 to around 300,000. I have owned this property for now eight years. Have around 115,000 of mortgage left. Currently I'm paying an interest of around $300 a month for mortgage and getting a rent of $2000. So around $1100 goes towards the mortgage ( net). The house will be rentable. The current tenant wants to lease it for another year. Currently the my household has two physicians who are working full-time and have a good cash flow raising three kids. And I made my own investment portfolio which has come down by 10% year to date. It is a well diversified portfolio which is inclusive of index funds and some individual stocks. I am not worried about it. I don't see much appreciation in the house price in 3 -5 years compared to a Total stock market index.

    If this same property is in a growing town, I would not be selling. I will manage it as long as I could.

    kids age - 12, 9 and 6. - thinking about college expenses in 5 years.

    I have to say this is the maximum that this property has appreciated in its lifetime. Some of the houses that put on the market has been sold within a few days. This is really good looking houses( for that town ) and very decent neighborhood.

    My questions:

    Should I sell the house? If so what would be the tax implications. Will I pay capital gains tax on the gainI get above 258,000. Or will I be paying tax on nearly 180000 I get after selling the house.

    or Keep renting it another 5 years, it will be almost paid off.

    any tips will be appreciated.

  • #2
    You'll pay tax on the gains above $258k.

    Assuming those two and a half years you lived there were pre-2017, that is, which is what it sounds like.

    But you may have made improvements or had other costs, which would increase your basis and lower your taxes. Something to look into.


    • #3
      You will pay capital gains and state taxes on the increase in value since the purchase, less any capital improvements that you made. In addition, you will also pay depreciation recapture taxes on the amount that the house depreciated over the years that it has been rented out. You have to pay the depreciation recapture taxes whether or not you took the depreciation deduction each year on your tax return. That is the IRS rule.

      We are in the process of selling our first rental property that we purchased many years ago when I was a resident in training. We calculated what we would owe upon sale and it would be around $90,000 in taxes owed! We decided to do a 1031 exchange to avoid paying the 90k in taxes.


      • #4
        Will the house sell now?


        • #5
          did you say why you want to sell the property? There are risks to holding on to it for sure, but it seems like a good rental property with long term tenants. The value of the property is not just the potential for appreciation, but the value of good rents.


          • #6
            I also consider that in the area where I have rentals the prices are so inflated right now that the rental income over the next few years would be a wash if/when prices tank or the inventory situation is changed making it more of a buyer's market. I'm not as adverse to paying taxes on the gains and making a clean break as some seem.


            • #7
              It would be fine to keep the house and keep renting it out. A paid off kicking off $2000 a month (probably a bit less as you pay taxes, repairs, insurance even with the mortgage paid off), is a valuable retirement asset. Why sell? You don’t like being a landlord; this is a bull market for houses and you can cash out on top; big repairs coming you want to avoid; you are moving… Selling for a clean break is fine too. What I actually did was keep (my two) paid off properties.

              If you sell the tax situation is a bit complicated. The 2 of 5 rule won’t apply, so you will owe LTCG. AS WBD says, you have to recapture the depreciation taken at 25%. The rest of the gain is: Selling price less costs to sell less purchasing price less any improvements to the property.

              Options to offset the gains? 1031 exchange works if you want another property. Any losses in the stock market you can harvest to use to offset the real estate gain? Exchange or sell and buy another property that is eligible for bonus depreciation. Make a large donation to your DAF. Just pay the taxes.


              • #8
                Good to know the depreciation recapture taxes. It makes a lot of sense.Reading all the posts makes sense to defer the sale for a year or two. But there is cash flow. It also gives me time to plan for the 1031 exchange. I need to do more research . I could take capital gains loss now on some stocks. But its not a good idea to sell. I like being and holding . Will do some tax loss harvesting.

                " We are in the process of selling our first rental property that we purchased many years ago when I was a resident in training. We calculated what we would owe upon sale and it would be around $90,000 in taxes owed! We decided to do a 1031 exchange to avoid paying the 90k in taxes." - Thank you at White.Beard.Doc

                Good insight above.

                6 more years the house will be paid off. I think its worth deferring the transaction for a year or two and have a plan before selling.

                Thanks every one of you above.