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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15587
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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capital gains on real estate

Resolved Question:


· Duplex in Berkeley CA.





· Purchased in 1992 as a TIC for 236K. I owned half.





· 1997 purchased the other half for 80K and refinanced the loan-now 310K or so.





· 2004 borrowed against the property for own business, property now valued at 850K.





· Current loan balance is 720K.





· Property-if sold today at 760K would break even with brokers fees.





· If I sell, do I owe capital gains tax on the appreciation since 1992 even though it is now owed to the bank?


Submitted: 2 years ago.
Category: Tax
Expert:  Megan C replied 2 years ago.
Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

Thanks for contacting us tonight. Unfortunately, Capital Gains tax is paid on the difference between your sales price and your basis.

Your basis is what you paid for the property, less whatever depreciation you have taken.

Based on the information you've given, the basis sounds $118,000 plus $80,000. This is assuming that $236,000 was the purchasse price of the ENTIRE duplex, of which you initially owned 1/2 of. If you have taken depreciation, you will need to deduct that from the basis.

Whether or not you currently owe the bank money won't impact your capital gains tax. When you get the money from the bank, you are not taxed on it. Therefore, it does not increase your basis. So, when you sell the duplex you will need to pay tax on the difference between the basis and the sales price, not the difference between what you owe and what you sell it for.

Please let me know if you need further clarifications.

If this helped, then rate my service as "excellent" so that I can be compensated for assisting you today. Otherwise, click "reply" or "continue conversation" for continued dialog with me.

VERY IMPORTANT - IF you are having DIFFICULTY RATING, please let me know IMMEDIATELY. If you don't rate my response, I don't get paid even though your deposit is retained by the site. Thanks for your cooperation in this matter.
Customer: replied 2 years ago.

can you confirm that capital gains tax would be 15%? If so, then my capital gains tax owed would be $84,000 based on a sale price of 760K. Is there any way to avoid this? if I can scrape together 84K cash and use it to purchase another home, can I avoid it this way?


 


Also-does the tax apply to just the home value or the total selling price including broker fees?


 


If for example the selling price is 720 + 40K broker fees, then does my cap gains change to 78K?

Expert:  Megan C replied 2 years ago.
Your capital gains rate will be 15%, you are correct. The tax figures in your post are also accurate, being $78,000. This is assuming you have not taken any depreciation on the property. Remember, that will reduce your basis. The IRS also tracks this, so if you "overlooked" your depreciation then you would receive notice a couple years after your tax return indicating an outstanding balance due.

You will only pay the capital gain on your sales price less basis, less cost of sales, so if you are paying a $40k broker fee so that will reduce your tax liability accordingly.

There is a way to defer (not avoid) your capital gain - this would be a section 1031 exchange. Your sale would have to be structured as a 1031 exchange and the sales proceeds would have to go to a "qualified intermediary" for safekeeping until you found. In addition, the property you purchase will have to be at least the same sales price as your other property you gave up.

Section 1031 transactions have to meet strict time deadlines set in place by the tax code. For example, you would have to identify replacement properties within 45 days of the close of your sale, and then close on the sale in no later than 180 days. If you are one day off on either of the timeline, the whole transaction is invalidated.

I would suggest contacting a real estate professional who specializes in 1031 exchanges, or a tax advisor. Keep in mind that your tax professional cannot be your "qualified intermediary."

Based on what you have told me about the transaction, it seems that a 1031 exchange would be challenging, at best - unless you found a buyer who wanted to trade you directly and your bank had no issues loaning you the money to fund your new purchase. Keep in mind that your 1031 property could not be a second home or primary residence; it would have to be an investment property.

I'm sorry that I don't have better news. I wish it were different - however, be glad that you asked about this before closing a deal. I would highly consider selling for a higher price so that you will have cash to pay your tax bill.

If you sold for the current value of $850,000 you would have a tax bill of $91,800. ((850-40-80-118)*.15)

After paying your broker's fee and paying off your loan balance, you would have $90,000 cash (850-720-40) and that would give you almost enough to pay your tax bill.

You're going to need to hold out for at least $850, unless you have significant cash reserves. Hope this helped, and I'm truly sorry if it's not the optimal situation for you.

Here's a site about section 1031 exchanges; please note, I do not know these people personally so I cannot endorse them. Further, I don't make recommendations of who to use - any reputable broker or tax professional in your area should be able to make a referral to a 1031 qualified intermediary.

If this helped, then rate my service as "excellent" so that I can be compensated for assisting you today. Otherwise, click "reply" or "continue conversation" for continued dialog with me.

VERY IMPORTANT - IF you are having DIFFICULTY RATING, please let me know IMMEDIATELY. If you don't rate my response, I don't get paid even though your deposit is retained by the site. Thanks for your cooperation in this matter.
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15587
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 6 other Tax Specialists are ready to help you
Expert:  Megan C replied 2 years ago.
One more thing - if you had suspended passive losses that were disallowed due to the limits on passive activity losses related to this duplex (it's possible, if it's a rental) you can deduct those in the year of your disposal. Your tax professional would know if you had any of these losses.

If you are, however, a real estate professional it's highly unlikely that you have these losses - but it's important for you to know that they could exist in the event you did have some passive rental activity on that property.
Customer: replied 2 years ago.

I think that I do have suspended passive losses as it is a duplex and I rent one of the units out and live in the other.


 


I will make an appointment with a tax attorney to dig into this.


Thank you very much for your help. I tried to rate you Excellent but had trouble getting the rating to "stick". If you would like me to try again, please let me know the best way to do it.


 


Thanks again-not good news, but I know where I stand.

Expert:  Megan C replied 2 years ago.
Well, you didn't tell me you live in part of it, either. That could change a portion of it for the better. A portion of your sales price could be excluded from capital gains because it's your primary residence. It all depends on how everything has been handled on your tax returns to date.

You don't need a tax attorney; a CPA will do. I tend to advise tax attorneys for people who are having trouble with tax law, for instance those going through collections or audit appeals- or that are petitioning the tax court. For preparation of tax returns, CPAs are usually your best bet.

Thanks for letting me know about the ratings; this is a known glitch in the system. Since you expressly stated that you tried to rate me, I can turn it in for manual approval through tech support. Thanks for letting me know about your rating issues!
Customer: replied 2 years ago.

Thank you! That is very helpful. I will get in touch with a CPA. Also-please feel free to use Excellent as my rating and to forward this message to them if you like.


 


Best Regards.

Expert:  Megan C replied 2 years ago.
Thanks for letting me know. Have a great night and I hope this works out better than we initially thought :-)

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Megan C
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Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level