how does capital gains tax work? - Posted by BigV

Posted by David Krulac on October 21, 2008 at 08:22:01:

that if you own for less than a year, whether the outgo is expensed or added to basis (depreciated) the tax rate is the same as ordinary income.

and another point is that if you do “too many” of these, and nobody including the IRS know how many are “too many” you’ll be a dealer and:

  1. you can’t take depreciation.
  2. you can’t do a 1031 tax free exchange.
  3. you can’t take installment sales treatment.

how does capital gains tax work? - Posted by BigV

Posted by BigV on October 20, 2008 at 12:33:04:

Say, for example, that I buy a fixer upper for 50K. Fix it up using 25K.

My holding costs are 6 months.

So, my total expenses are 25K rehab, plus 3500 holding costs (including insurance)

My sale price is 150K.

What value will my capital gains tax be based on?

Re: how does capital gains tax work? - Posted by JHyre in Ohio

Posted by JHyre in Ohio on October 22, 2008 at 06:44:56:

Other responses are basically correct. Couple of points:

  1. Dave Krulac & JT are correct in re possibility that capital gains are irrelevant once you are a “dealer” - ordinary income is at same rates as STCG, but self-employment/social insecurity tax applies.

  2. You get the vast-majority of write offs (“pre-tax dollars”) whether or not you have a corporation, entities are grossly overtouted by promotors who generally overcharge for them. There can be additional tax benefits to an S or C corporation, depending upon your very specific and personal circumstances…setting up a corporation w/o a competent analysis of those circumstances will likely create a lot of needless expense (not savings) and hassle. The only real reason for an S-Corporation is to help reduce SE/SS taxes.

John Hyre

If you hold for less than 12 months - Posted by Rich-CA

Posted by Rich-CA on October 20, 2008 at 19:25:34:

then the tax rate is your regular income tax rate. Some but not all of your fix up costs can be added to the base. It really depends on what you do to the property. Holding costs are not part of the basis for determining cap gains.

Not as good as it will next year - Posted by JT-IN

Posted by JT-IN on October 20, 2008 at 15:15:09:

Not funny… but likely true… Cap gains taxes will be at a higher percentage rate next year, if early discussion on the subject is any indicator…

However, what you describe is a STCG, o… short term capital gain… which are taxed at your marginal income tax bracket, as compared to LTCG, which are now taxed at 15% or less. Most taxpayers will be taxed at 15% of LTCG. In order to be taxed at less than 15% LTCG you must be in the 15% marginal income tax bracket, or making appx 63,700 or less for married filing joint, 31,850 or less for single filers.

So… your appx 61.5K of profits will be taxed at your marginal rate… likely 35%. It is best to stetch out your holding periods beyond 1 yr to possibly be eligible for LTCG*

  • Dealer activity having a longer holding period than 1 yr may not qualify for LTCG tax treatment and profits would be taxed as ordinary income, regardless of holding period. Check with your Acct for clarification of Dealer Activity.

Re: If you hold for less than 12 months - Posted by BIgV

Posted by BIgV on October 21, 2008 at 04:32:27:

Thanks Rich. So, my income from the property may be as high as sale price minus purchase price (since fixup and holding costs may not increase the base price?)

Re: Not as good as it will next year - Posted by BigV

Posted by BigV on October 21, 2008 at 04:34:38:

too bad I exceed 64K. Will McCain keep this rate lower than Obama?

Re: If you hold for less than 12 months - Posted by Rich-CA

Posted by Rich-CA on October 21, 2008 at 07:05:04:

Certain repairs will count. For example: flooring replacements such as tile, become part of the base price since they are not items expensed in the first year. Also if you replace a roof, water heater or furnace. Paint and carpet are arguably depreciated and thus would become part of the base. But they may also be expensed the first year in which case they would not.

This is one reason you put the property into an S-Corp, because all legitimate business expenses (does not include meals you’d pay for yourself if you were working for someone else, for example) are paid with pre tax money, which will reduce your tax exposure in the end.

The safe guestimate would be to take the sale price, subtract the purchase price and use the net for determining your tax hit. If a corp owns the property then your other expenses would be subtracted from this net to yield the taxable income.

Hard to say… and doesn’t matter - Posted by JT-IN

Posted by JT-IN on October 21, 2008 at 12:24:34:

It simply doesn’t matter who is POTUS… doesn’t matter what the tax rate is…

It is too late to discuss this relative to an investment that you own and are selling now… You will be impacted some… more or less regardless.

Simply concentrate on making money, not what might be 2 weeks from now or 2 yrs from now… If you were talking about a deal worth hundreds of millions, yes, by all means tax plan. In the realm that you and I make money, just concern yourself with the task at hand, the rest will take care of itself…