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Author: Polywilliams Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127262  
Subject: How to deal with cap gains? Date: 2/27/2004 9:24 AM
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I have a motherload of credit card debt and wish to pay it off.

To speed up the transition into debt-free living, I am selling 2 rental houses, both of which have closing dates within 2 weeks. (keep fingers crossed)

I have never lived in either, but have owned each for > 2 years. If capital gains is figured at 25% of (sales price minus basis), I estimate I'll owe around $12,500 in capital gains tax.

Questions:
1. When is this tax due? Upon sale? When I figure and pay my '04 taxes next spring?

2. Is this an absolute tax where the $12,500 will be due regardless of my income taxes or will it be somehow added to my income tax liability and could be offset by credits. (I have paid zero federal income tax for 2 years...actually the fed PAYS ME. My tax bracket is in the negative!)

3. If it is an absolute cut-n-dry tax amount, surely the rest of my gain will not be taxed as ordinary income. Is this true?


I am thinking about using every penny I can from the sale of the houses to pay down my cc debt...even the $12.5K that I'll owe Uncle Sam. Then, I'll adjust my witholding so that I have that 12.5K available when it is due next year. Or, better yet, I could leave my witholding alone and place money in a savings account every payday and avoid an interest-free loan to the govt. Does this sound reasonable?

My job, income, and health are rock solid. I am willing to assume the risk of betting that there will be no change in job/income/health or other extraneous variables in the next year. If a savings plan as above would work, I'll go for it.

Thanks for your thoughts!

Polywilliams

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