I have rental property which I like to sell which may give me about 100000 in profit at this point I dont know how it will effect me as tax wise ? I also like to know whatis the best thing to do ? If I sell what sould do should I buy another property or put itin my house as more down payment ?any suggetion please respond . thanks in advance.
shah,First of all, congrats on asking these questions BEFORE you do the sale. That puts you well above many people I deal with.Ok, first lets talk about the profit you are guestimating. I assume that $100,000 profit is what you figure as the difference between what you bought for and what you can sell for. If you are like my average client, you may not realize that there can be other adjustments to your basis in the property. First, if you have made any permanent improvements over the period since you bought the rental, these will generally add to your basis. Another issue is depreciation, which is the accounting method for the general wearing-out of the property (trying to keep it simple here). For tax purposes, depreciation is an (non-cash) expense that you can deduct each year on the rental. Whether you actually claimed the depreciation or not, you are still treated as if you did and depreciation slowly lowers your basis in the property. (You didn't say how long you had owned the property.) So the point is - make sure you know what you profit is going to really be before you start figuring your tax liability. (it could be much more than you might guess)Next you have asked if you should buy another rental property with the money. That is a question that will be very individual in nature and I can't really answer it for you. BUT, if you decide to buy another rental property then the smartest tax method for this is called a 1031 exchange. You have to set this up BEFORE the sale (again, see point one) but once you do you can postpone paying tax on the gain from the sale. There are particular rules for the exchange, but the most important is that you have to have the money go to a qualified disinterested third party. You'll have to look around your local area to find one and the fees will probably vary greatly, but it will be worth it to avoid the tax liability for a little longer.If you decide to put the money into the house, you MUST remember to pay Uncle Sam (and your state, if that applies) FIRST before you do anything else. You will need to make an estimated tax payment out of that money before you do anything else - I can't stress this enough. There is no way to avoid paying the tax on your gain if you are goig to put the money to use for anything in your personal life.How much tax you will pay on the gain will depend on your particular situation. You could end up on a high tax bracket and unable to make IRA contributions. You might end up phasing out your exemptions and standard/itemized deductions, and you could experience the joys of AMT. All of this is dependent upon your particular situation, so you will need to sit down with your tax professional and plan ahead.As you can see, there are no easy answers as a lot depends upon your situation. But asking these questions BEFORE you have sold the property is very Foolish.Gerald
gerald.....isnt it true that if he buys "like property" within a certain periodof time, he only pays tax on the dif between what he paid and what he sold...or is it that he gets a one-time sale of his home, and if he buys a new home with the $$, there is no tax involved....and isnt there some kind of benefit for a one-time sale of your homeonce you have reached a certain age???or, did i mix all this up? or did i make it up?i seem to rememember a client who sold a picasso at a huge profit afterowning it for 10 years,....i think we were able to buy another paintingwithin 90 days...using the profit funds...and thus were not charged tax on the gain....or am i confused again?yrs,sasha
isnt it true that if he buys "like property" within a certain periodof time, he only pays tax on the dif between what he paid and what he sold...Only the 1031 exchanges already discussed in this thread. They must be set up BEFORE the sale.or is it that he gets a one-time sale of his home, and if he buys a new home with the $$, there is no tax involved...and isnt there some kind of benefit for a one-time sale of your homeonce you have reached a certain age???Nope, those are both older tax laws. Tax law changes. Now there is a $250,000 exemption on gains from the sale of your personal residence if you've living in it for two years out of the previous five years.- Megan
thanks megan........clearly i'm living in the past....//s
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