Hi there,
How do you calculate how much you will have to pay on capital gains tax after the sale of a home?
Thanks
JayDee
Sales price less purchase price less depreciation.
Basically whatever the asset is on the books for is subtracted from the sales price to figure capital gains.
Expenses such as maintenance, repairs, etc are expensable items on the Income statement not items on the Balance sheet.
Hope this helps.
JayDee,
Is this your primary residence you are asking about? If so, how long have you owned and lived in your home?
Thanks. This is an investment property. It was bought for $57,000.00 in 1999 and it was a fixer upper, so there were alot of repairs done to it. The sales price is $129,000.00.
I don’t know what the depreciation is. How do you figure that out?
Thanks
JayDee
Depreciation for SFR is computed over 27.5 years.
Some repairs may have been classified as capital improvements (replacing a 20 year roof for instance is a capital improvement, but repairing hardwood floors isn’t). Capital improvements are depreciated over the life of the product or by the prescribed MACRS depreciation schedule. (Office furnishings are depreciated over 7 years in general, office buildings over 39 years, etc).
If you’ve not claimed depreciation to this point it wouldn’t serve any purpose to do so now. Depreciation would have been calculated at $2072 per year that you would have been able to write off as an expense (albeit, a non-cash expense) to help your tax position from 99 to present.
How did you use this property – as a rental, or as a second home, or a vacation home, or what?
You purchased the property for $57K. What percentage of your property tax assessment is allocated to the land, what percentage to the improvements?
How much rehab did you do? At what cost?
What month in 1999 did you purchase?
I don’t agree that there is no useful purpose in trying to catch up with unclaimed depreciation but I don’t have enough information yet to really answer your question accurately. Moreover, I don’t have enough information yet to know whether depreciation would even be allowed for your property.
What if JayDee took out an equity loan on the property up to the full value of the home now and then sold the property for that value? Then since the sale price of the home is the same as the loan value, on paper there was no gain from the sale. He could then payoff the morgage with the sale and he would still have the money from the home equity morgage in the bank but now it would not be considered capital gains from the sale because it is money from an equity morgage.
prtyatmoontower,
This is a common beginner mistake. The taxable profit on the sale is the difference between the sale price and the cost basis. Note, that this formula does not include the mortgage amount at all.
It is the profit that is taxed. The presence or absence of financing is irrelevant to the profit calculation.
O.K. Dave but how would the profit be calculated? What is it based on? I’m not trying to fight your reasoning, I really don’t know as I am new to all of this anyway But I am curious as to why this would not work.
Here is the general formula,
Profit = Net Sale Price - (Purchase price + rehab cost - allowable depreciation)
where,
Net Sale Price = Contract Sale Price - Selling Costs
Under your reasoning, only the amount that exceeds the loan balance would be your profit. While this may seem attractive when you have 100% financing, let’s see what happens in situations where the financing is less.
Case 1. Let’s say that you buy a $100K property, pay all cash, and you own the property free and clear. Let’s say that you get a promotion and an unexpected job transfer the next day so you have to sell the house in the next two weeks. You find a buyer that will pay you $100K so you will not lose any money on the deal. You settle before you have to move.
Under your reasoning, in Case 1, your profit would be $100K because there is no loan balance to pay off. Even though you paid $100K for the property to begin with, you would pay taxes on the sale proceeds of $100K, rather than have zero taxes because there is zero profit.
Case 2. You buy a $100K property, pay all cash, and own the property free and clear. When the property appreciates to $150K, you decide to sell. Since this property was not used for a rental, you had no depreciation expense, and you sold FSBO so you have no sales commissions or other selling costs. The difference between what you paid for the property and your sale price is $50K.
Under your reasoning, in Case 2, your profit would be $150K because there is no loan balance to pay off. Even though you paid $100K for the property to begin with, you would pay taxes on sale proceeds of $150K, rather than your true profit of only $50K.
Case 3. If instead, you decided to finance the purchase in Case 2 with $20K down and a mortgage note for $80K, your purchase price does not change. You have only taken $20K out of pocket but your purchase price is still $100K. When you sell the property at its appreciated value of $150K, you pay off the balance of your $80K loan. Let’s say your loan balance has dropped to $75K, so you walk away from the settlement table with $75K in your pocket. Of this amount, $20K is a recovery of your original downpayment, $5K is a recovery of the amount of your mortgage payments that were applied to your loan balance, and the remaining $50K is your profit.
Under your reasoning, in Case 3, your true profit is only $50K, but you would pay taxes on $75K.
Now let’s consider one more case.
Case 4. Let’s take the property in Case 3 that you purchased for $100K using $20K in cash and a mortgage note for $80K. When the property has appreciated to $150K, you decide to do a 100% cash out refinance. You pay off the loan balance of $75K, have $75K in your pocket and a new mortgage note of $150K. A few days later you get your promotiion and transfer orders. You find the buyer that will pay you FMV of $150K which you use to pay off the mortgage note (fortunately you do not have a prepayment penalty).
The $75K that you have in your pocket really came from the equity in your property. Your refinance converted your equity to cash. A portion of that equity is due to the appreciation in your property, your profit in other words. Your refinance is simply a cash advance on your profit – profit that became taxable when the property was sold.
O.K. #4 is really the situation that I was refering to. So with that analogy the tax is based on the profit. Profit being the diference in the sale price of the property minus the origional purchase price regardless of any finacing or morgage. In that case the profit in example #4 would be 50K$ and not 75K$ because 20K$ of that is his down payment and 5K$ of that is principal that was paid by him already leaving 50K$ profit. Does that sound right?
While Case 4 contained specific circumstances that you suggested, I hope you see from all the cases I presented, that the presence or absence of a mortgage loan had nothing to do with the taxable profit calculation.
Yes Dave, Thank you. I think I was confused as to what the legal definition of the term profit is in regards to realestate and taxes. Thank you for your help and examples.