Posted by David Krulac on April 06, 2005 at 17:15:24:
because if they do then they charge more than an accomodator here who’s a CPA and charges $500 flat rate. Cheapest I’ve found and they are dependable. I’ve been doing exhcnages for 3 decades and had experience with different accomodators.
Selling a rental…capital gains tax - Posted by Heather
Posted by Heather on April 05, 2005 at 21:18:09:
Hiya,
We own a model home in a new subdivision. The builder rented it from us for almost 3 years. We owe $170K on it and I estimate it to be worth about $210K or so. Is there a way to avoid paying capital gains? One thing that I was thinking of was doing a home equity loan and pulling the equity out of the house and then selling it for not much of a profit. Is this doable? I really need some good advice…it makes me sick to think of paying out all that money to the government… :-/
Re: Selling a rental…capital gains tax - Posted by TomC (MD)
Posted by TomC (MD) on April 06, 2005 at 10:41:18:
I’d pull out the equity now, and then sell it in 2008. In that year only, there is 0% tax on long-term capital gains if you keep your taxable income low enough. Based on the 2004 tax brackets, a married couple making less than $60K a year would pay 0% cap gains tax in 2008.
I plan on making less than 60K in 2008…because I’m going to retire from my day job part-way through the year and sell most of my portfolio. 
TomC
Consider an installment sale - Posted by Randy (SD)
Posted by Randy (SD) on April 06, 2005 at 09:35:45:
As previously stated there is no way to avoid capital gains on your profits. But you can make the bite less painful by doing an installment sale (owner financing), you still pay the 15% capital gains tax but only on the profit as you receive it. Suppose your basis (acquisition cost) is $150,000 your sales price is $210,000 assuming a $10,000 down payment and seller financing $200,000 at 8% interest the payment would be $1467.53 (71.4% = basis, 28.6% = profit) take 28.6% of annual payments received and $5036 is subject to capital gains tax at 15% ($755.40) as opposed to 15% on the total profit in one year ($9,000). You still pay the same amount of tax just in smaller bites, you can eat an elephant one bite at a time. Obviously this may not the applicable in all situations competent tax advice is prudent, check out “installment sales” at www.IRS.gov
Re: Selling a rental…capital gains tax - Posted by William L Exeter
Posted by William L Exeter on April 06, 2005 at 24:32:14:
The amount you owe has nothing to do with the actual capital gain tax liability that you would have to pay if you sold the property and did not do a 1031 exchange transaction.
Do you intent to buy another rental property, or do you just want to cash out? You could complete a 1031 exchange, but that would require that you purchase another rental property.
You could move into it (convert it to your primary residence) and you could exclude up to $250K in capital gain taxes if you are single or up to $500K if you are married after you have lived there for at least 24 months (you would still incur any depreciation recapture tax, but the capital gain tax would be excluded up to the $250/$500K).
Hope this helps.
Re: Selling a rental…capital gains tax - Posted by Rich[FL]
Posted by Rich[FL] on April 05, 2005 at 21:32:28:
Nope. Since you’ve owned it for over 1 year, you will owe capital gains tax at a 15% rate. Plus, you’ll owe depreciation recapture tax at 25% for the depreciation you took. Unless…
You do a 1031 exchange into a new property. Or…
Did you live in it for at least 2 of the last 5 years? If so, then you qualify for the capital gains exclusion and won’t owe any tax at all.
Hope this helps.
Rich
Re: Selling a rental…capital gains tax - Posted by Dave T
Posted by Dave T on April 06, 2005 at 12:20:54:
I think there is a lot of confusion on this 2008 zero tax thing.
It is true for taxpayers in the 15% bracket or lower that the long term capital gains tax rate will be zero for one year only in 2008. This does not nedessarily mean that all of your sale profits will be tax free.
Instead, only the amount of taxable capital gain that keeps your total income in the 15% tax bracket will enjoy the zero percent capital gains tax rate. All long term capital gain (sale profit) that pushes your total income into the 25% tax bracket will be taxed at 15%.
If is a fallacy to believe that you can sell a very large investment portfolio tax free if your other ordinary income puts you in the 15% tax bracket.
Re: Selling a rental…capital gains tax - Posted by Carl CA
Posted by Carl CA on April 06, 2005 at 10:57:46:
Tom,
Do you have a link explaining the 2008 provision?
Thanks,
Carl
Re: Consider an installment sale - Posted by Dave T
Posted by Dave T on April 06, 2005 at 12:27:00:
Randy,
Check the depreciation recapture rules when an installment sale is involved. I believe all profit received during the year of the sale is applied to depreciation recapture first (at 25%), then allocated to return of principal and profit.
Re: Selling a rental…capital gains tax - Posted by Bud Branstetter
Posted by Bud Branstetter on April 06, 2005 at 01:33:14:
My understanding was that the IRS has clarified that on a conversion from a rental property to your home you now have to live there for 5 years.
Re: Selling a rental…capital gains tax - Posted by Heather
Posted by Heather on April 05, 2005 at 21:36:09:
Thanks for your reply.
No…we didn’t live in it. So there’s no way to do like a home equity loan for say $40k pulling out the equity and then selling the house for $210K so that it appears that we didn’t make much money on the sale since we owed $170K on the first mortgage and $30K on the home equity? This is confusing… :-0
Re: Selling a rental…capital gains tax - Posted by TomC (Md)
Posted by TomC (Md) on April 06, 2005 at 11:28:33:
Hi Carl,
There are tons of links - use Google and seach for “JGTRRA 2008 capital gain” and you will get a bunch. I just did it and came up with a few…
From this site:
http://www.cbo.gov/bo2005/bo2005_showhit1.cfm?index=REV-03
The most important statement is:
“In a major innovation, JGTRRA extended the 5 percent and 15 percent rates …Under the law, the rates are effective from 2003 through 2008. In 2008, the 5 percent tax rate is scheduled to drop to zero.”
So, anybody in the 15% or lower tax brackets will pay ZERO tax on long-term capital gains. While we don’t know what the income limits will be for each bracket in 2008, here are the ones for 2005:
http://www.irs.gov/formspubs/article/0,,id=133517,00.html
Basically, in 2005 the 15% bracket cuts off at $29,700 for singles and $59,400 for married filing jointly. By time 2008 rolls around, the limits will probably be slightly higher.
Hope this helps,
TomC
Re: Selling a rental…capital gains tax - Posted by William L Exeter
Posted by William L Exeter on April 06, 2005 at 15:35:48:
Hi Bud,
Actually, the requirements are:
Rent it for a sufficient length of time - I would recommend at least 12 months - in order to qualify for your 1031 exchange transaction.
Live in the property for 24 months (not five years) in order to qualify for the 121 exclusion
And, OWN it for five years (new law passed on 10/22/2004).
Natalie is correct in that this ONLY applies if the property was acquired as part of a 1031 exchange transaction.
Re: Selling a rental…capital gains tax - Posted by Natalie-VA
Posted by Natalie-VA on April 06, 2005 at 14:42:36:
This is referring to property that was acquired through an exchange. I don’t think she acquired it that way.
this would still qualify … - Posted by David Krulac
Posted by David Krulac on April 06, 2005 at 06:50:42:
becasue they already rented it for 3 years, if they lived in it for 2 more years they would have owned it 5 years before selling.
Re: Selling a rental…capital gains tax - Posted by Carl CA
Posted by Carl CA on April 06, 2005 at 11:47:27:
Thank you Tom,
I’m just starting to get familiar with this opportunity. From your
understanding, if my wife and my taxable income is zero in 2008
(other than capital gains), I will pay no tax on our capital gains under
the amount of our 15% bracket in 2008 ($59,400 in 2005)? What
about gains above that amount? We have substantial equity in rentals
and are wondering if 2008 is the year to liquidate.
Carl
Re: this would still qualify … - Posted by Mark
Posted by Mark on April 06, 2005 at 07:29:43:
You are correct. You have to own it for 5 years and live in it for 2 out of those 5 years. You do not have to live in it for 5 years.
Re: Selling a rental…capital gains tax - Posted by TomC (MD)
Posted by TomC (MD) on April 06, 2005 at 12:10:50:
Hi Carl,
The way I have read and heard it described in presentations is that as long as your combined regular (W-2, 1099, etc)wages keep you in the 15% tax bracket in 2008, you pay ZERO long-term capital gains tax that year…with no $$ limit on the amount of long-term assets that you can liquidate.
I plan on selling all my rentals in 2008, since I have also built up substantial equity.
If anybody else has some informed info about this, I would like to hear their it as well!!
TomC
Re: this would still qualify … - Posted by Buddy
Posted by Buddy on April 06, 2005 at 08:14:46:
If you do a 1031 exchange check with your local bank, many large banks now have 1031 Departments that will do the exchange for less than half the cost of an attorney and they do not charge for wire transfers, overnight mailings etc.
Re: Selling a rental…capital gains tax - Posted by Carl CA
Posted by Carl CA on April 06, 2005 at 13:00:16:
Tom,
Sounds almost too good to be true. I’ll be reviewing this with my CPA
in depth within the next three years.
Thanks for your input.
Carl