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Finally got around to talking to a CPA today about what taxes I'll be liable for when(now if) I sell a vacant home I've had the last 20+ years. About 20% of the sales price is what I'll be liable for. Of course there are some credits and stipulations, a breakdown of what portion gets taxed at what rates but that's not really why I'm writing this now so I'll spare ya the details.
Given the loss of equity due to taxation I've got to delay a potential sale and rethink my options. I have a buyer who is eager to move on the deal we've discussed thus far. I need to explore the options I still have before I put that signature to paper.
My main thought/alternative is to spend the money to update and repair the home and turn it into a rental instead of selling it.
Here's the reasons why:
My main reason for thinking about selling the old home was to put the proceeds into a secure "income" type investment. With the loss of equity due to taxes it drops my expected "income" to be about 20% less and possibly so low as to be essentially useless towards the goal of a job free lifestyle. Certainly it would allow for extras, but I'd still have to work at least another ten years. So, taxes eliminate the main reason for selling the old home.
After the repairs/updates are made and someone rents it out, as long as everything goes as planned, I'd actually make a higher annual income on the property than any secure "income" type investment would have made with the original equity if I sell. Rentals I've had in the past were a bit of a hassle though, so I'd have to figure that out to work better than in the past.
After about two years in a rental status, it should qualify for a 1031 exchange type sale if I want to roll that equity into a multiplex or apt building elsewhere. Not sure of the tax liability at that point, still need to research it. IDK any of the details of 1031 except how to qualify a property for 1031.
Anyway, mostly just airing out my guts at this point. I sorta felt like someone had just died when I found out the dollar amount that goes to the gov.... city/county/IRS/Obama care... excise tax I knew, second home vs primary home caught me off guard(I didn't qualify, I thought I would), 1031 exchange(I don't qualify), capitol gains, investment income tax(higher rate on over half of sales price) and an Obama care tax on the portion subject to investment income tax. I don't even have healthcare! (insert profanity)
900k is the sale, 160k-175k is the estimated tax, home is located in Seattle, WA, Wallingford, developer was just gonna knock the old home down and bust the lot into 3 lots then build. Talked with the buyer's agent, a CPA and a 1031 facilitator attorney today...... after the news I told the agent not to call me for two days and that the last thing I want to hear from my money is "Goodbye!"
Thanks for any feedback or ideas, concise references to read are much appreciated!
they are wrong if your profit was 900k . but you are saying sale price , what is the cost basis then or did you mean 900k gain ?.
it will likely be more then that on a 900k gain or even 1/2 that amount . , a capital gain that big will likely trigger the amt tax on all other income , a 20% capital gain tax and a 4% medicare surcharge . also if you have state taxes they do not recognize special capital gain rates .
we had a gain like that a few years ago and taxes were way more then just the 20% capital gain tax . i think the total damage was around 38%
if you are approaching medicare age in the next 2 years it will give you a 300% increase in premium based on today"s rates .
taxes are nothing new and they tend to rise .
delaying taxes with exchanges may hurt you . we delayed selling by one year and capital gain rates jumped from 15 to 20% on the sale and a new 4% medicare surcharge tax was added at that level ,so 9% more by delaying that one year .
kicking the can down the road while taxes are still historically very low may be a mistake .
Last edited by mathjak107; 06-15-2016 at 02:17 AM..
they are wrong if your profit was 900k . but you are saying sale price , what is the cost basis then or did you mean 900k gain ?.
it will likely be more then that on a 900k gain or even 1/2 that amount . , a capital gain that big will likely trigger the amt tax on all other income , a 20% capital gain tax and a 4% medicare surcharge . also if you have state taxes they do not recognize special capital gain rates .
we had a gain like that a few years ago and taxes were way more then just the 20% capital gain tax . i think the total damage was around 38%
if you are approaching medicare age in the next 2 years it will give you a 300% increase in premium based on today"s rates .
taxes are nothing new and they tend to rise .
delaying taxes with exchanges may hurt you . we delayed selling by one year and capital gain rates jumped from 15 to 20% on the sale and a new 4% medicare surcharge tax was added at that level ,so 9% more by delaying that one year .
kicking the can down the road while taxes are still historically very low may be a mistake .
I'll try to clarify and answer your questions.
Negotiated sale price currently is 900k, no signed contract yet.
The long story on the cost basis would/could be a bit confusing so the short answer on the cost basis is approx 200k. So approx 700k profit.
I was informed yesterday that the first about 200k? of that is taxed at about 15% as capitol gains and the next 500k is taxed at an investment tax rate(they changed the name of this portion of the tax) of about 20% and add to that about 2% Obama Care tax on the 500k.... Of course the whole 900k gets hit with about 2% city/county excise tax. 22-25% on the profit... close to 20% on total sale price. Commission and closing costs covered by buyer if all goes well.
The Affordable Health Care tax is not a medicare tax from what I was told yesterday...."Medicare isn't part of ObamaCare's Health Insurance Marketplace" but the 4% isn't a familiar number so I need to look into that. Maybe what I "thought" was 2% is actually 4% to Obama Care... it was a lot of info to absorb over the phone and I was physically nauseous when I heard 160-175k was going to say goodbye.
How did you jump from 24% to 38%? 20+4...... Because of your other income and the alternative minimum tax?
Currently living off of savings, no to very little interest income so alternative minimum tax shouldn't be an issue but I hadn't looked into that, thanks!
No income tax in WA.
No medicare cause no health insurance. Call me a rebel!
OH, 180 days, get them to permit, before closing clause.... would most likely close in 2017 if I move forward with the sale.
I think what I really need to do is really investigate the specifics of a 1031 exchange next.... but it'll be hell-of-a lot of money to get her to rental quality with these codes Seattle instituted recently for rentals.
Last edited by MarkFromSea; 06-15-2016 at 03:31 AM..
the healthcare tax is 3.80% . they do refer to it as a medicare surcharge tax also . it is applied to unearned income over 200k for a single or 250k for a married couple .
yes there is a very good chance all your other income will be hit with the amt at that level . plus we had new york state taxes and nyc taxes . most states do not tax capital gains at reduced rates . you pay the full tax rate . the amt penalty we saw i think was in the 16k range but i was only working part time at that time since i was getting ready to retire the following year . ..
but , because we owed so much in state and local taxes when we filed our taxes our deduction for state and local taxes paid that we take the following year triggered the amt tax again . this time based on the massive state and city tax deduction and not income . the pain just kept going lol
we had that sale in 2014 when we were not retired nor on medicare .
my wife went on medicare in 2015 , since they go back 2 years to determine your premium , for 2016 they increased her medicare premiums by 300% . had both of us been on medicare that would have been a 600 a month increase for the year . yep , increase , not payment .
so while the capital gains rates do not sound to bad they can cause ramifications in other areas that increase taxes and premiums .
Last edited by mathjak107; 06-15-2016 at 03:55 AM..
Finally got around to talking to a CPA today about what taxes I'll be liable for when(now if) I sell a vacant home I've had the last 20+ years. About 20% of the sales price is what I'll be liable for. Of course there are some credits and stipulations, a breakdown of what portion gets taxed at what rates but that's not really why I'm writing this now so I'll spare ya the details.
Given the loss of equity due to taxation I've got to delay a potential sale and rethink my options. I have a buyer who is eager to move on the deal we've discussed thus far. I need to explore the options I still have before I put that signature to paper.
My main thought/alternative is to spend the money to update and repair the home and turn it into a rental instead of selling it.
Here's the reasons why:
My main reason for thinking about selling the old home was to put the proceeds into a secure "income" type investment. With the loss of equity due to taxes it drops my expected "income" to be about 20% less and possibly so low as to be essentially useless towards the goal of a job free lifestyle. Certainly it would allow for extras, but I'd still have to work at least another ten years. So, taxes eliminate the main reason for selling the old home.
After the repairs/updates are made and someone rents it out, as long as everything goes as planned, I'd actually make a higher annual income on the property than any secure "income" type investment would have made with the original equity if I sell. Rentals I've had in the past were a bit of a hassle though, so I'd have to figure that out to work better than in the past.
After about two years in a rental status, it should qualify for a 1031 exchange type sale if I want to roll that equity into a multiplex or apt building elsewhere. Not sure of the tax liability at that point, still need to research it. IDK any of the details of 1031 except how to qualify a property for 1031.
Anyway, mostly just airing out my guts at this point. I sorta felt like someone had just died when I found out the dollar amount that goes to the gov.... city/county/IRS/Obama care... excise tax I knew, second home vs primary home caught me off guard(I didn't qualify, I thought I would), 1031 exchange(I don't qualify), capitol gains, investment income tax(higher rate on over half of sales price) and an Obama care tax on the portion subject to investment income tax. I don't even have healthcare! (insert profanity)
900k is the sale, 160k-175k is the estimated tax, home is located in Seattle, WA, Wallingford, developer was just gonna knock the old home down and bust the lot into 3 lots then build. Talked with the buyer's agent, a CPA and a 1031 facilitator attorney today...... after the news I told the agent not to call me for two days and that the last thing I want to hear from my money is "Goodbye!"
Thanks for any feedback or ideas, concise references to read are much appreciated!
It makes no sense that you would need to work for 10 years to make up a 20% loss. If you invest at a return of (say) 7%, in 3 years you have made it up, if you reinvest earnings. I don't know how you are coming up with 10 years.
It makes no sense that you would need to work for 10 years to make up a 20% loss. If you invest at a return of (say) 7%, in 3 years you have made it up, if you reinvest earnings. I don't know how you are coming up with 10 years.
To get me to retirement age, draw social security. Only my age.
kicking the can down the road while taxes are still historically very low may be a mistake .
This.
Add to it that Washington State has no state income tax at the moment and that might not last forever. This is all long term capital gains taxed at a very low rate. You don't want to take the risk that there will be huge changes in Congress next January from the crazy election going on now where the capital gains rates go up and they start making you pay Social Security on it. I don't have a functioning crystal ball but taxes are going up eventually and it's likely that they will mostly go up for rich people. A $900K gain is in the rich people category.
The only exception is if you're using real estate as part of estate planning. Unlike stocks, with real estate, the cost basis is reset to market value the day the the owner dies. You're better off letting children inherit real estate than your 401(k) (the worst) or after-tax investment portfolio.
900k is the sale, 160k-175k is the estimated tax, home is located in Seattle, WA, Wallingford, developer was just gonna knock the old home down and bust the lot into 3 lots then build. Talked with the buyer's agent, a CPA and a 1031 facilitator attorney today...... after the news I told the agent not to call me for two days and that the last thing I want to hear from my money is "Goodbye!"
Thanks for any feedback or ideas, concise references to read are much appreciated!
Can you work a deal where you do the subdivision yourself and sell the builder three lots over two or three tax years? That would save you some tax dollars.
Can you work a deal where you do the subdivision yourself and sell the builder three lots over two or three tax years? That would save you some tax dollars.
Don't do this. You run the risk of converting the property to inventory and changing the character of gain from capital to ordinary. Nightmare.
it was a lot of info to absorb over the phone and I was physically nauseous when I heard 160-175k was going to say goodbye.
That's the government for ya. Organized crime is what it is
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