Capital Gains???

General Real Estate Investing
1

I recently sold a property that was used as a primary residence for the past 15 years. it’s a 6 family building, I paid 145K for it and sold it for 770K, i know i’m gonna have to pay a lot on gains but can someone tell me what the current rate is??

thank you/

2

ooh, 6 family building is only partially considered “residence”. I’ve never done one of these.

Dave may have the answer. If not, I’ll do some research for you.

3

thanks for the response Mark. but when you said it’s considered partially “residence”, what do you mean by that?? is it because it’s a multi-unit building??

thanks again…

4

loveRe,

You sold a 6 unit building. One of the units was your primary residence while the other five were used as investment rentals (I’m guessing).

The IRS wants you to bifurcate your sale. That is treat the sale of your building as if you had two separate transactions. If all six units were essentially the same size, then allocate one-sixth of your sale price and one-sixth of your settlement and selling costs to your residence. The remainder is allocated to your investment property.

Now figure out your income tax liability on the sale of your investment property as if you sold a five unit building. Apply the Section 121 capital gains exclusion to the sale of your residence unit.

5

bifurcate? now THAT’s a word you don’t hear every day.

6

hi Dave,

what happens if my children use another 2 units ( my son lives on 1 and my daughter on the other) and they dont pay rent. Now, would my income tax liability on the investment property be as if i sold a 3 unit???

thanks,

Rex

7

if they are adult children, then I would suspect that your primary residence is just 1/6; especially if you collected rent from those units prior to children occupying them. Also, this might open an additional can of worms as the “free rent for my kids” can be considered a gift by the IRS since you are not charging market rent. You can give up to $11k per year to each child so it not a taxable event, but I think there is some paperwork needed. Also, its going call into question how you did your Sch E in past years (i.e. you did pro-rate expenses, right?).

I think you should spend some money to hire a CPA or EA expereicned with real estate to review your prior tax years as well as advise for the current year. You have a lot of stake.

8

yep. this is a can of worms.

and, not to dump on you, but to educate others who read: This is an example of poor financial planning. Actions have consequences.

9

I’ll take a very broad stroke at this… without factoring a section 121 exchange for your portion of the 6 family…

Also note… didn’t see your state in your profile either loveRe so, you might end up on either side of this…

loveRe Capital Gains Tax Calculation

I figured:
Capital Improvements of 50K
Depreciation of 70K
State Cap gains rate of 6%
Selling Expenses of 40K

Comes to a total gains tax of: $134,050

Granted this is a little broad, and it’s probably a worst case scenario if you do not do a section 121 for your portion of the building… but it should be a ballpark…

BTW, mcwagner you had me rolling with the bifurcate comment…

Hope this helps…

10

loveRe,

I guess we all got caught up in how the transaction would be taxed and did not really answer your question.

For your federal income tax return, the current long term capital gains tax rate is 15%. Apply this rate to all the profit from the sale allocated to the five investment units.

The profit from your residence unit up to $250K is tax free. Any profit above $250K is also taxed at 15%.

11

Dave,
How does she divide her unit as part of the sale?

Is it 1/6th, or can she get more agressive if her unit has more rooms/bedrooms is greater sq. feet. Maybe she has the first floor back yard…

Any hidden advantages she might have here…
Starke

12

well, a potential problem I see is that while they were living in one unit, they were also giving away free rent in two other units. Therefore, constructive ownership may have been 3 units, with related depreciation, etc as “rentals” even though the rent was gifted.

yep, can o’ worms.

She needs to talk with a CPA who can research these issues for her.

13

unless the units are substantially different in grade and character. (i.e. one “unit” is a 100 yr old house and other “units” are a 10yr old building with 3 apts.), I don’t see the IRS want to haggle over the split (i.e. do a straight 1/x) where X is the number of units.

if you attempted some kind of other splitting method, you most likely want to get an appraisal to back it up.

14

Section 121-1(e)(3) provides that, for purposes of determining the amount of gain allocable to the residential and business portions of the property, the taxpayer must allocate the basis and the amount realized using the same method of allocation the taxpayer used to determine depreciation adjustments

15
[Section 121-1(e)(3) provides that, for purposes of determining the amount of gain allocable to the residential and business portions of the property, the taxpayer must allocate the basis and the amount realized using the same method of allocation the taxpayer used to determine depreciation adjustments ]

Dave,

Does this hold true for all owner occupied properties regardless of number of units? Would it hold true for…say…a three unit or is this something that only applies to properties 4 units or above??

16

deaaak,

All owner occupied property? NO, certainly not for the single family dwelling.

Holds true for all multiunit property where one unit is owner occupied and the others are investment rentals – even if that property is a duplex