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
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
The other day I read about a real life real estate investor who’d been pretty successful, and had decided to step away from the life, and begin their retirement. Sounds good to me. Betcha there’re a lotta folks readin’ this askin’ themselves under their breath, “Where do I sign up?” The article in question was about a guy who’d followed what he’d thought was the tried ‘n true strategy one of his mentors had taught him. Buy property — never EVER get rid of it — refi for more investment cash when prudent and possible — rinse, lather, repeat. It’s not relevant if the agenda was cash flow or capital growth. The ending will be roughly the same.
Though it’s not absolutely necessary, that strategy almost always results in the following relocation for the investor. Between a rock, a hard place, the IRS, and post job existence more analogous to a life sentence than a dream retirement. This presents a thorny problem for those who wish robust second careers requiring much capital, or those for whom after tax cash flow from real estate is paramount to the success of their retirement. Here are some of the details to which you may look forward after following such a rigidly defined investment strategy. Continue reading