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3/9/2018
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,755
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
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Hello.

Q: My question is how much do I need to invest to avoid paying capital gains.

A. You would have to reinvest through a 1031 exchange the full proceeds to defer capital gains. --In your scenario $950,000 minus any sales cost

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Customer reply replied 5 months ago
But I still have to pay the mortgage on it. So if I want to do this, I have to come up with $500k to pay it off in order to not pay capital gains

The portion of the mortgage that you used to purchase a home and pay off personal debt is not included in your cost basis

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The proceeds from the sale of the first home will pay off the mortgage. The remainder will be used to purchase the second property.

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Customer reply replied 5 months ago
in this scenario, if I just bite the bullet and pay capital gains, what would be the amount subject to capital gains tax. Assuming a cost basis of $450k and selling expense of $50k. Assume no depreciation was taken.

If the net proceeds isn't enough to fully purchase the second property, you would have to obtain financing, but the capital gains from the first property will still be tax deferred.

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With $450K of net capital gains, you will be taxed on capital gains at 20%

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$450K x 20% = $90,000 tax liablity

Plus there an additional Net investment income tax of 3.8%

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This would bring your total tax to $107,100 on $450,000 net capital gains.

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Customer reply replied 5 months ago
Ok. I read somewhere that if I make less than $70k that I am exempt from capital gains

Capital gains are added to your ordinary income to determine your taxable capital gains.

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Capital gains net income goes on the front page of the 1040 line 13

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Customer reply replied 5 months ago
Ok. Thank you very much. This is very helpful. I guess I will just keep everything status quo.

Sometimes, I do think it is better to just pay the capital gains tax because the cost basis also carries over to the new property.

Please do let me know if you think of additional questions.

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Customer reply replied 5 months ago
One last thing. If I don't have all my tax returns since I acquired the property 30 years ago, how do I determine the adjusted cost and total depreciation I have taken over the last 30 years

The adjusted cost is your original purchase price AND all the improvements you have done over the years.

Investment properties are depreciated equally over 27.5 years (unless you choose a separate depreciation schedule) If you have owned the property for over 30 years, then you have used all the depreciation.

The annual depreciation amount is based on your original cost divided by 27.5 years.

For example $450,000 / 27.5 = $16,363 of depreciation each year

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Customer reply replied 5 months ago
Perfect. Thank you very much. This gives me plenty to chew on. Does the site save our string of questions and answers?

Yes, they do.

You could also book mark this chat specific web address by saving the chat as a favorite with your web browser

Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,755
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
Verified
Chad EA, CDFA®, CFP® and 87 other Tax Specialists are ready to help you
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Customer reply replied 5 months ago
I will do that. Thank you. I will resend the rating. I thought the site just cut me off earlier so my initial rating was just 3 stars. I will change to 5.

Thank you very much.

Have a great day and please do let me know if you have any additional questions.

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