how to handle tax on a rental sale loss

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Loon11
Posts: 423
Joined: Wed Feb 29, 2012 5:07 pm

how to handle tax on a rental sale loss

Post by Loon11 »

Bogleheads = anyone know how to handle taxes on the following cases:
I sold a rental house in '06 at approx 115K profit (pd $50K, sold for $165K). There was close to 20 yrs of depreciation taken - approx 23-25K. We used the proceeds to purchase "like property" (1031). purchased two land lots. paid $109 for one and $85K for the other. So - now in 2013, the
$109K lot is worth about $70 (not sure what we can get for marshfront) and the other one we will be lucky to get $55K.
My question then is: do I have to pay 25% on all the original depreciation first? there is no profit left so I wonder how to handle if I am able to sell.
complicating it further is it is 2 lots and I think I divvy it up as lot #1 counts as 2/3 and lot #2 1/3.
I have not sold them yet but have put them up for sale. It may take forever.
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SnapShots
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Joined: Wed May 09, 2012 12:39 pm

Re: how to handle tax on a rental sale loss

Post by SnapShots »

Complicated question. IMO: You need to talk with a CPA who can look your whole financial picture.
the best decision many times is the hardest to do
HouseStark
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Joined: Mon Oct 15, 2012 2:31 pm
Location: Minneapolis, MN

Re: how to handle tax on a rental sale loss

Post by HouseStark »

If you want to look at the detailed implications, you should consult with a qualified tax advisor, such as an EA or CPA.

Things to keep in mind, if you did a 1031 exchange when you sold the rental house, that means you didn't pay any taxes back then, because the gain and depreciation recapture were deferred. The land took on the basis of the house. If you sell the land now, it will have whatever basis and depreciation that the house had upon sale. The basis will also be increased by any "boot" or additional money that you put into the land purchase. I add that because you said the house sold for $165k and the lots were purchased for $194k, so it appears you paid in to acquire the lots. There's a number of moving pieces in the determination of actual taxes on sale, but the fact that the lots are worth less than you paid for them is not a factor. Your total purchase price for the lots is not your basis. The allocation of gain between the two lots is just a matter of allocating basis upon sale.
MarkNYC
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Re: how to handle tax on a rental sale loss

Post by MarkNYC »

Wheen you say there is no profit left, you are conveniently forgetting about the large gain on the original sale, which was deferred for tax purposes, but not eliminated.

If you bought the original property for $50K, took depreciation of $24K, then sold for $165K, your gain on that sale (which was deferred) is $139K, not $115K, since the depreciation taken reduces your tax basis. If your replacement property cost 194K, that basis is essentially reduced by the deferred gain, bringing your adjusted basis down to
$55K, so if you sell for $125k you have a net gain on the entire transaction of $70K. Looked at another way: $139K gain first property minus $69K loss on second property = $70K net taxable gain upon sale. The depreciation portion of the gain is subject to tax at 25%.
Topic Author
Loon11
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Joined: Wed Feb 29, 2012 5:07 pm

Re: how to handle tax on a rental sale loss

Post by Loon11 »

Thanks! And if I sell only one lot, I pay the depreciation ratio on that one I assume - or would I pay the entire depreciation on the original property first?
HouseStark
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Joined: Mon Oct 15, 2012 2:31 pm
Location: Minneapolis, MN

Re: how to handle tax on a rental sale loss

Post by HouseStark »

The basis and accumulated depreciation would be allocated between the two lots, most likely on the relative purchase costs. This would not be a first to sell gets the gain or recapture type of situation.
Topic Author
Loon11
Posts: 423
Joined: Wed Feb 29, 2012 5:07 pm

Re: how to handle tax on a rental sale loss

Post by Loon11 »

Thanks all! I did realize I had a big profit on the original sale and now wish I had just paid it, and avoided the 1031 lots. At least then I would have had something from the sale. Now I have 2 lots that won't sell and I have an annual tax bill on each. But maybe in years to come they will appreciate and my son will inherit them at whatever t hey are worth then. Death takes care of the capital gains!
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