Taxes, Fees, other hidden costs?

General Real Estate Investing
1

Hi Folks,

Newbee here, and I’ve just started targeting pre-foreclosures in my area of Wilmington DE. I’ve made some initial contacts with some very motivated sellers, but unfortunately they were all so upside down, I couldn’t help them much.

My question is two part.

  1. Capital Gains. I understand that it is 25% if you hold a property less than 2 years. How is that 25% calculated? On gross purchase and sale prices, or can I deduct holding costs, improvement costs and the like?

  2. What are some other fees, comissions, or little “gotchas” that I may not have thought about which may impact my bottom line?

I want to make offers to these sellers that make sense for both of us, but I have to have a better understanding of these areas before I can do that.

Thanks,

Jay

2

Hi Jay. You are right. Most of these people have used their house as an ATM machine and it is so highly leveraged there is no money in them.

You should get a CPA to look over what you are trying to do. They are not that expensive. But I have found that capital gains tax is 15% of the increase after 12 months. The increase is figured on the sales price minus the acquisition costs. These costs include the purchase make ready and holding costs, marketing as well as broker fees.

3

any non-owner occupied properties (investment properties) that you/your business owns is subject to capital gains taxation.

things like depreciation (time), capital improvements and original cost of goods (purchase price) work to decrease the cap gains you pay.

capital improvements and cost of goods and certain fees become your BASIS in the property.

anything above that is taxed at a capital gain rate (currently 15%).

see an accountant for more details.

best of luck to you! :biggrin

4

Thank you for the explainations, and for the suggestions about a CPA in my area. Very good advice, as I just started reading about these things and realized it would be prudent to obtain some qualified help in this area.

Jay

5

Jay,

It sounds like you will be trying to flip these properties. If this is the case, then your PROFITS will be ordinary self-employment income – not capital gains – regardless of your holding period (even if it exceeds one year).

The profits will be taxed at your marginal tax rate AND subject to self-employment income taxes as well. If you are in the 25% tax bracket, the total federal tax hit will run about 40%. Add state income taxes on top of that.

Your CPA can give you more specific details about how your proposed “dealer dispositions” are taxed and which entity structure best minimizes the self-employment income tax in your situation.

6

Some ‘gotcha’ costs include utilities. Gas, electric, outside maintenance (lawn care, leaf raking, snow shoveling), water, sewer.
Especially in cold weather, you need to have the heat on to a minimum to avoid frozen pipes. So factor that in.

7

AND depreciation. Saves you current year income, but depreciation is taxed at 25% when you sell capital property. That’s whether you actually took the depreciation deduction or not.

Lots of folks don’t realize this. Depreciation decreases annual taxable income, but actually INCREASES your capital gain when sold.