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jgdarragh2285
jgdarragh2285, Accountant
Category: Tax
Satisfied Customers: 392
Experience:  Former IRS Agent, Master of Accountancy, Tax Return Preparer
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Dear justanswer.tax, I purchased a house out of foreclosure

Customer Question

Dear justanswer.tax,

I purchased a house out of foreclosure in April, 2013 (7 months ago) for $70,000. I have invested approximately $15,000 in it. I currently have two purchase offers pending for my asking price of $118,000. One offer (Offer "A") is straight cash. The other offer (Offer "B")is for the potential buyer to sign a contract to rent the house for 6 months (@$750/month) while he gets his finances in order, and then purchase the house in April, 2014. Initially, this seemed like a "no brainer"...but then, a friend pointed out the the Capital Gains taxes would make a major difference if I held on to the house for at least 12 months. He anticipated that I could pay as much as 30% in capital gains taxes on my profit if I "flip" the house immediately, with the capital gains taxes dropping to, as much as 15% if I hold the house for at least a year. I anticipate turning a $24K profit after deducting the cost of improvements, attorney, closing, etc...

My wife and I are both retired. My retirement is $80K/year, and my wife's is $65K/year. We own two rentals which gross $16K/year. Last year, my wife and I filed seperatly, with the rental income being included with my tax return.

My question is: Would it be better to accept the cash offer A, and pay the higher capital gains- and definitely have the money in hand, -or take offer B and pick up $4500 in rent and hold the property until April, 2014 (with a degree of risk while he gets his "financial house in order"?
Rick in West Liberty
Submitted: 11 months ago.
Category: Tax
Expert:  jgdarragh2285 replied 11 months ago.

jgdarragh2285 :

Hi my name is XXXXX XXXXX I will be helping you today with your tax question. You are correct that if is a long term capital gain, asset held for more than a year, you will qualify for a lower tax rate at 15%. So if you are able to I would suggest that option B is better only because you are being paid to wait, and by waiting not only are you earning the rental income but you are also reducing your taxes on your gain from as much as $7200 down to $3600. This does come with a degree of risk, but if it is not costing you anything besides real estate taxes to hold the property, I think it is in your best interest from a tax perspective to wait. Even if this "buyer/renter" doesnt come through, if you have two offers right now so quickly chances are you will be able to get offers again next year if needed. Additionally it is unlikely that the real estate market is going to go any lower, so I think that although it is a risk to hold it, it is a low risk.

jgdarragh2285 :

If you want to free up the capital though to take on another project that is something to consider also, but if you do not have a instant need for the cash and can afford to wait, I think that the rewards for waiting outweigh the risks.

Customer:

Joe,

jgdarragh2285 :

Yes I am here

Customer:

Joe, thanks much. I agree with you as the house is in a desirable location and won't lose value in the next 6 months.

jgdarragh2285 :

You are welcome, I think that is your best bet considering the limited risk even if this buyer doenst work out

jgdarragh2285 :

Is there anything else I can do for you to ensure you are satisfied with your answer?

Customer:

Your answer is good. I'm not in need of any immediate capital, and considering that my loan on this house is 2.6%, it's not hurting me. Thanks much for your insight...Rick

jgdarragh2285, Accountant
Category: Tax
Satisfied Customers: 392
Experience: Former IRS Agent, Master of Accountancy, Tax Return Preparer
jgdarragh2285 and 7 other Tax Specialists are ready to help you

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