I bought a fc for 50,000. I can sell for 70,000 today. I can rent for 800.00 a month. If I bought and sold w in 1 year what will I pay for the 20,000 profit/ If I have 3 loans already that I am renting out, what would make a bank give me another loan? I want to sell as I need cash to buy another but don’t want to give 33% in capital gains as I have heard it would cost me. Is this true?
What would you guys do as investors?
What the heck is an “fc”?
Furnished condo?
Family compound?
Former cornfield?
Please enlighten dumb little me. Couldn’t find it in the glossary either. Is it local lingo?
Thanks, Furnishedowner
foreclosure
it would be considered INCOME tax not capital gains.
read this article and then look at the tax calculator to give you a good idea
Thanks Bunches
If you sell within one year, your sale profit is a short term capital gain taxed at your ordinary income tax rate plus whatever tax rate charged for your state income taxes. If you are in the 25% tax bracket, then the federal tax hit will be 25%. If your state income tax rate is 8%, then the combined tax hit will be 33%.
If you are deemed to be a dealer to real estate for this transaction, then the federal tax rate is once again your 25% ordinary income tax rate, AND, you will have to pay the self-employment income taxes (social security and medicare) that apply, making your federal tax hit about 40%. Add to this whatever income tax you will also have to pay the state.
If I have 3 loans already that I am renting out, what would make a bank give me another loan?
If your credit score is high enough and you meet the income requirements to qualify for a new investment loan, there is nothing to stop a bank from giving you a fourth loan.
Since you have three financed investment properties, do we assume that you also have a mortgage loan for your primary residence? If so, then you have four financed properties. There are some markets in the country already hard hit with foreclosures where the banks won’t give you a fifth loan if you already have four (including your primary residence). It won’t matter how good your credit is, the bank won’t give you a fifth loan in that market. If you are not investing in those markets, then there is a 10 loan limit if the banks sells their loans to Fannie Mae and/or Freddie Mac.
Once you reach the bank’s loan limit, look for lenders who don’t sell their loans, but instead, keep their loans in their own loan portfolio. These portfolio lenders will have other risk criteria to govern the number of loans given to an individual.
That kinda lets the air out of my sail if I end up paying 40% in tax. Doesn’t seem fair to do all the work to give it to the government.
Do alot of you investors just pay the 40% and reduce your profit or wait 1 year and a day?
If your deal is a dealer disposition, then the profit is ordinary income, not capital gains. The holding period does not matter since capital gains don’t apply.
Dave, I didn’t understand. Sorry
If you want your cash out, you have to pay the taxes. The only way to not pay taxes is to live in it for 2 years, and even that loophold is getting reduced, and I suspect even more reduction to come.
When you flip property, you are acting as a dealer to real estate. The dealer determination is made on a case by case basis for each property sold. When you are a dealer to real estate, the sale of your property is called a “dealer disposition.”
If you are deemed to be a dealer to real estate for this transaction, the profit is ordinary self-employment income (not capital gains). Since capital gains don’t apply, it does not matter how long you held the property. Even if the dealer disposition occurs more than one year and a day after you acquired the property, the profit on the sale is still ordinary self-employment income.
Dave
you seem to know a good amount on the subject, i got a question about being considered a real estate professional.
from the definition here “A real estate professional is someone who is involved in real estate activities and owns 5 percent or more of his or her business and a minimum of 750 hours in real estate.”
wouldnt most real estate investors qualify for this ?? as long as they have some of their own money in it.
What does owning 5% of your business mean? Sorry to be so slow.
You don’t quite have all the requirements. A real estate professional
Pretty hard for the part time investor with a full time job to meet the 50% rule.