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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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I have a house that Ive been renting to a couple for 2 years.

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I have a house that I've been renting to a couple for 2 years. They want to buy it we've agreed to the payoff & $10,000. I owe $7000 to my daughter who paid the mortgage during a period when I was under employed. How will this affect my taxes this year? I'm single, my gross income will be under $40,000, I itemize & always (at least up til now!) get a tax return, usually a couple thousand dollars. I know the house will be a wash; I'm hoping not to lose more money in taxes!

Lev :

Hi and welcome to our site!
The fact of you owning to your daughter doesn't affect your tax liability unless you will pay interest .on that loan. That is because when you took a loan - it was not included into your income - so when you pay it back - it is not deducted either.
When you sell a rental property - you need to calculate your gain or loss on that sale.

Lev :

Your gain/loos is calculated as (selling price) MINUS (adjusted basis)
Your basis is mainly your purchase price. You will add your purchase expenses, selling expenses, improvement expenses and subtract depreciation you claimed over the time the property was rented. That will be your gain.
If your gain will be zero - you mentioned that the house will be a wash - there will not be any tax liability - but still the sale transaction must be reported.

Customer:

So basically, my income is going to seem like I made 10,000 extra this year.

Lev :

That is based on your gain or loss. If you have a gain - then - yes - it will be added to your income.
But to calculate the gain - we need to start with your basis.

Lev :

Your basis is mainly your purchase price. You will add your purchase expenses, selling expenses, improvement expenses and subtract depreciation you claimed over the time the property was rented.

Lev :

If you do have a gain - a part of the gain is treated as ordinary income to the extent of depreciation allowed or allowable on the property.
Any gain recognized that is more than the part that is ordinary income from depreciation is taxed as long term capital gain at reduced rate - not more than 15%

Lev :

Let me know if you need help to determine your basis.

Customer:

A ray of hope!... the original price we paid for the home was around 96,000. (Very nice, new double wide on 1.3 acres of land; bought in 1995) The payoff is around 68,000 plus the 10,000, so does that mean the capital gain/loss is calculated on the original price, or what it's worth now?

Lev :

Your gain/loos is calculated as (selling price) MINUS (adjusted basis)
I assume that your selling price would be 68,000 plus the 10,000 - total $78k.
Your purchase price $96k need to be prorated between the land and the building - because the land is not depreciated. I just assume 20% to the land - $39.2K and $76.8 for the building.
Now - we need to know how many years the property was rented?

Lev :

If the property was rented only for two years - estimated depreciation would be $76.8 / 27.7 * 2 = $5,585
So your adjusted basis is $76.8 - $5,585 = ~$71.2k
You will prorate the sale price between the land and the building - $78 * 20%=$15.6k for land and $62.4k for building.
So you will report your sale as
land $15.6k (selling price) - $39.2K (basis)
building $62.4k (selling price) - $71.2k (basis)
So far - it looks as you will have a loss on both - the land and the building - and there will not be any additional taxable income..

Customer:

Just wondering if you're still there & did you get my follow-up question?

Lev :

I did and responded above - please scroll.

Lev :

If you are not able to see - I will switch to Q&A mode - let me know.

Customer:

The web site for viewing is horrible... you can only read one line at a time & I need to keep scrolling through the loop to see if you've answered. It doesn't end, either, just keeps starting over.
I tried going on thru my e-mail link, but that wouldn't let me see the response area at all.

Lev :

I will switch to Q&A mode - please refresh.

Lev and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Thank you! I couldn't see anything on that other page except the first 2 paragraphs, but I could see that you kept typing!

The land was actually $16,000. We did one of those land/package deals so it was all financed together. I'm sure we financed a hefty sales commission at the time for the guy who made the sale. :/

I'm going to go back & re-read what you wrote, because I have to process it (I'm slow...lol), but wanted you to know that I could finally read what you wrote!

I'll have to check my tax returns to see what I depreciated the house for the past couple years. What you figured I'm sure is in the ballpark; I was using TurboTax or something like that.


 

take your time.
That above is a raw estimate - just for illustrations - not for reporting!
Your actual amounts will be different.
Customer: replied 3 years ago.

Yes, I know. I will recalculate using the correct amounts at tax time; I'm just thankful I'm not going to have to pay out any more for this house! I've tried to keep it current to protect my credit, but it will be a big relief to know I'm done with it & it won't cost any more money. In fact, it looks like it will help me this year!
Thanks again & have a great day!