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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 13404
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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We purchased a foreclosure home that we have renovated. Is

Resolved Question:

We purchased a foreclosure home that we have renovated. Is it better tax wise to rent or sell?
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

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.

MyVirtualCPA :

I would say that it is better to rent than to sell

MyVirtualCPA :

This is because you are able to deduct losses against active income, up to $25,000

Customer:

What are the tax benefits to renting? If we would sell and make a profit, what are the tax consequences?

MyVirtualCPA :

You will have losses due to depreciation

MyVirtualCPA :

If you sell and make a profit, then you pay capital gains tax on the amount that you sell the house for that exceeds your purchase price

Customer:

So what would the taxes be if we made a profit of $50,000?

MyVirtualCPA :

How long have you owned the property?

Customer:

Just a month and a half.

MyVirtualCPA :

Okay then you would pay tax at your normal income tax rate

MyVirtualCPA :

do you know what tax bracket you are in?

Customer:

Not sure our bracket - but we made $110,000 last year.

MyVirtualCPA :

If you hold for a year or more, the rate is favorable - 15% for those with incomes under $400K per year and 20% for those with income above that amount

MyVirtualCPA :

You'll most likely be in the 25% bracket, depending on your deductions

MyVirtualCPA :

so, 25% of $50,000 or about $12,500

Customer:

So even though it will take longer to make our money back renting, it's smarter than selling, right?

MyVirtualCPA :

I think so. I'm a fan of renting

Customer:

If we decide to sell, how long do we have before we have to reinvest the money before we pay taxes on it? Or do we even have time?

MyVirtualCPA :

The only way you can defer the tax on a sale is to do a 1031 exchange which is where you exchange this property for another property

MyVirtualCPA :

there is no ability to avoid tax through reinvestment otherwise

Customer:

Okay - thank you so much for your help. I think we are going to rent it.

Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 13404
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 8 other Tax Specialists are ready to help you

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