You might think selling a piece of real estate is a simple tax situation, but you would be wrong. Many considerations need to be thought out. Not the least of which is determining the original basis and the adjusted basis at time of sale. When you know your basis you can determine if there is a gain or loss on sale. If there is a gain you may also have depreciation recapture. The worst thing that can happen though is that inadequate records were kept.
Determining the proper basis is not as easy as looking up the original purchase price. It is not uncommon that investors spend time and money in the acquisition process. You might have travel expenses related to your inspection of the property; you might have hired someone to inspect various properties for you. Many of these due diligence costs must be added to the basis of the property you purchase. When you purchase the property there are also acquisition costs paid, like a title search and recording fees. Loan related fees are not added to the basis of a property.
GAIN OR LOSS ON SALE Continue reading
Some of you may have read my earlier post I wrote on depreciation recapture. I got several comments after the post asking for a translation. Seems I got caught up speaking in that foreign language of IRS codes and provided no cipher.
To help you better understand depreciation recapture, I’m going to explain three key concepts so that you can better understand how it affects taxes paid. These three concepts are:
Basis / Adjusted Basis in property
Gain on Sale
Depreciation recapture related to the gain
Original Basis Continue reading
In some ways the purchase of a car is similar to the purchase of real estate. Like a car there are generally less concerns when buying new. Older cars and buildings can have deferred maintenance issues. You will soon see there can be many other issues as well.
As investors we commonly check that a used property is sound and fit to be used as a rental. Sometimes though there are hidden surprises that are harder to see or take more digging to find. If they are not found before you purchase the property they can prove to be hidden time bombs.
I recently spoke with an investor that bought a property in Maine. The home had recently been remodeled looked quite well and was sold as an energy efficient building. As winter rolled in my friend discovered the home had little to know insulation – a huge problem in Maine. Can you say unhappy tenants and big utility bills?
This kind of surprise usually sees the light of the day early on. Other surprises can be just as costly or more costly and lay hidden for years. Continue reading
We often talk about special capital gains treatment for real or personal property we sell. Reality is that real and personal property are not capital assets and don’t fall under these rules. Real property is given favorable gains treatment under section 1231 instead.
Almost from the beginning congress decided that because depreciation can be used to offset ordinary income that special rules should be in place to treat any future gain as ordinary as well. Since the 1960s there have been depreciation recapture rules.
What is depreciation recapture?
Depreciation recapture doesn’t add to a taxable gain it’s a method of determining the tax treatment of any gain. Basically depreciation recapture is a method determining how much of any gain should be treated as ordinary income as opposed to getting a special capital gains treatment.
How it works Continue reading
While I make it my business to understand the tax code, it becomes apparent sometimes just how much there is to know. New regulation is only part of it. Existing tax code is also not stagnant and often there are finer points missed or little used. The tax code is made up of many exceptions that for the average person are little or never used, but for tax preparers we need to know when any exceptions might apply.
As I look back on this tax season I realize that I probably learned more during this season than any other. For me, that’s saying something because I’ve been at this for over 20 years. Continue reading