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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15206
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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We are going to have a reduction in income and things are already

Resolved Question:

We are going to have a reduction in income and things are already tighter than we would like. We own two properties in MN
1 is a rental house. Cost basis $185,000, probable yield after sale $135,000

1 is an empty lake lot held >5 years. Inheritance. Cost basis zero, probable sales price $200,000, assume 15% long term gain, 8% MN tax, 5% commission.

If we sell these properties it will free up $1500/month of which about $500-750 would go towards expenses and half could be reinvested in retirement savings.

We are planning to sell them both this summer with the understanding the capital loss on the rental will help offset the capital gain on the lake lot.

We also want to make sure that my understanding that long term real estate appreciation is 4-6% so we are not losing out long term by not holding on to the lake lot as an investment. Right now, however, finding the money to pay the taxes is stressful.
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thank you for your question and thanks for using JustAnswer.com. How are you tonight

MyVirtualCPA :

On your inherited land, you may not have a large tax liability

MyVirtualCPA :

Your capital gain would be the difference between fair market value on the date of the death of who you inherited it from and your sales price

MyVirtualCPA :

If the inheritance is fairly recent, you may not have a tax liability at all on the sale of the vacant land

Customer:

The property was transferred into my husbands name before his fathers death but meant as an inheritance

Customer:

his mother is still alive

MyVirtualCPA :

Okay then your basis is equal to your father's basis

Customer:

so I think legally a transfer and not an inheritance for tax purposes

Customer:

OK, basically about $2000 basis then

MyVirtualCPA :

No, it's not...but your basis would be equal to the basis in the property at the time of the transfer

Customer:

His father paid about $2000 for the land 30+ years ago

MyVirtualCPA :

Yes, then that's the basis

Customer:

OK, that was our understanding

MyVirtualCPA :

Your capital gain will be 15% of the amount of the sales price above $20,000

Customer:

$2,000?

MyVirtualCPA :

Oh, the land was purchased for $2,000

MyVirtualCPA :

I thought you said $20,000

Customer:

Yes, purchased for $2,000

MyVirtualCPA :

Wow he got a good deal

Customer:

Yep, now worth about $220,000

MyVirtualCPA :

Unfortuantely, if he would have waited until his death to transfer then your basis would have been the basis on the date of death but now the basis is $2,000

Customer:

may have been over 40 yrs ago

Customer:

But are we understanding correctly that if we take a $45,000 loss on the rental sale, it offsets the gain on the empty lot?

Customer:

and we pay 15% of the overall gain

MyVirtualCPA :

Yes, if you take a loss on the rental that will offset some of your gain

Customer:

Ok, what are your thoughts on keeping the lake lot as a long term investment even if it is causing us short term financial stress?

MyVirtualCPA :

And yes, there is no depreciation recapture on the rental because you are selling at a loss, and you pay 15% on the gain, provided your income is not above $400K per year

Customer:

or the lack of cash flow is causing us stress

MyVirtualCPA :

I don't know enough about the real estate market in that area to comment. It's a matter of preference

MyVirtualCPA :

If you can hold the land, it should appreciate if it is waterfront land

Customer:

understandable.

MyVirtualCPA :

But I wouldn't put yourself in a bad financial position

MyVirtualCPA :

just in hopes of appreciation

Customer:

just trying to decide if we have any other questions

Customer:

hang on a second

MyVirtualCPA :

Okay

Customer:

Do you know if there are any specialists on Just Answer that might be able to comment on land investment vs other vehicles?

Customer:

investment vehicles I mean

MyVirtualCPA :

Right now, if you are going to sell, is the best time

MyVirtualCPA :

When interest rates head back up, selling prices will fall

MyVirtualCPA :

You probably have a good year

Customer:

thats what we are thinking

MyVirtualCPA :

Interest rates are at about 4.6% or so, as high as its been since 2006 and going upward. People are snatching up what they want

MyVirtualCPA :

I looked at some real estate that I wanted, and it sold before I could decide whether or not to buy!

MyVirtualCPA :

It's a seller's market right now.

MyVirtualCPA :

People are paying more than asking price

Customer:

Cool

Customer:

Thanks

MyVirtualCPA :

No problem.

MyVirtualCPA :

Thank you for your positive rating. Please come back and ask me if you need any other finance guidance. It was a pleasure working with you tonight. I wish you the best of luck in the sale of your real estate.


 

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15206
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and other Finance Specialists are ready to help you
Customer: replied 1 year ago.

Just another question I thought of. Do we pay capitals gains just to the feds, or also to the state of MN where the property is and the state of OR where we live?


 

Expert:  Megan C replied 1 year ago.
Thank you for your follow up. You will pay capital gains to the feds, MN, and OR but you will get credit in OR for taxes you pay to MN

Thanks again for using JustAnswer.com
Customer: replied 1 year ago.

Do you know where we find the MN capital gains tax rates?


 

Expert:  Megan C replied 1 year ago.
Thank you for your follow up

You can read a flyer about MN capital gains tax rate, here:

http://www.house.leg.state.mn.us/hrd/pubs/ss/sscapgain.pdf

Thanks!
Customer: replied 1 year ago.

So am I reading it correctly that we could avoid paying fed capital gains if we keep our tax bracket at 15% ?


We could do that easily by putting our entire paycheck into 401K and regular IRA contributions

Expert:  Megan C replied 1 year ago.
Yes, you are reading that correctly.

Thanks
Customer: replied 1 year ago.

So just confirming, our best tax strategy would be to dump a bunch of money into 401K and pre-tax IRA to bring our taxable income below $72,500


And yes, I will give you a huge tip if this is the case cause it will save us a bunch of money

Expert:  Megan C replied 1 year ago.
Yes, if you can keep your taxable income within the 15% tax bracket then you will have a capital gains rate of 0% If you can do this through contributing to your 401(k) then that would be the way to go.

Please let me know if you need anything additional. Thanks again for using JustAnswer.com and have a great night.
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15206
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and other Finance Specialists are ready to help you
Customer: replied 1 year ago.

Totally forgot to ask - this is just our salary income that we need to keep below $72,500 right? Not that income plus the income from selling the property?

Expert:  Megan C replied 1 year ago.
The income from selling the property would be used to calculate your tax bracket, so it would not just be your salary income.

Thanks

Customer: replied 1 year ago.

darn

Customer: replied 1 year ago.

Does that also affect our tax bracket for regular taxes?


 

Expert:  Megan C replied 1 year ago.
The capital gain will get the preferential rate, and the rest of your income will be taxed at ordinary rates. Thanks.
Customer: replied 1 year ago.


When do we pay the capital gains tax? With regular taxes, or as estimated tax?


 

Expert:  Megan C replied 1 year ago.
You will pay it on your 1040 when you file. However, if you want to pay it in advance, you can. Thanks
Customer: replied 1 year ago.

No penalty then for waiting until April 2014 to pay?

Expert:  Megan C replied 1 year ago.
No, no penalty for waiting.

Thanks

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