re: So I'm going to pay 15% real estate capital gains on a measly $38K ??

You might not owe shite. Single people can exclude up to $250,000 and married couples can exclude up to $500,000 of the capital gains from a home sale if all of the following apply: This home is your Main home. Your gain from the sale was less than $250,000 (if single) and married couples less than $500,000. If married, you filed a joint return for the year of sale or exchange. Either spouse meets the 2-out-of-5-year ownership requirement.

Example, you and your wife bought a nice lake house in 2011 for $150,000. This was your main home and where you lived. You sold it in 2022 for $625,000 (congrats on the nice arse gain). You filed your 2022 income tax return married filing jointly. You don't owe anything on your $475,000 capital gain of your home. You most likely pocket the whole amount of the gain tax free. Note: See the applible IRS publications as there are a few more rules.

You can also deduct home improvements from the capital gains. So say your capital gains for the home sale were $675,000 in the above example, but you had $200,000 in approved home improvements. Again you likely don't owe nuttin, baw.

Read the current IRS publication on this and fire your CPA if they missed this exclusion and it applies to your situation.

IRS Topic #701: Sale Of Your Home

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How can anyone go through life like this blaming anything that doesn't go their way in life on some Democratic bogeyman? Do people really live like this? It's so sad.

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is this real???

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What’s real, is your lack of knowledge.

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You came to the money board and showed both your financial and political ignorance and got called out. And by the way, you've got my political leanings all wrong.

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No, you all have taught me that "15% is a great taxation level!" because "other taxation is much higher!"

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Thus the reason for asking the question!

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What is your question?

Are you going to pay 15% on your capital gain? Yes. Might even be higher depending on depreciation recapture.

But I don’t think you’re asking about what rate you’re going to pay. I still have no idea what your actual question is.

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I have plenty of time to pour it into another property

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You have to identify the target property in 45 days baw. Then you have 6 months to acquire it. (ETA, and like JimBeam said, you have to have the 1031 set up at closing and the lawyer escrows the funds until the new buy.)

I got tired of a 9th ward rental toward the end of COVID too. Exchanged mine into a timberland that is now worth more than I paid. The Cap Gain on my old rental was a bit over 100K so I thought shielding/delaying those taxes was worthwhile. For $38K the benefit may be minimal.


I think the 15% tax on capital gains is pretty reasonable and it has been at that rate for a while for most average income levels. Can't blame Biden for that one.

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Does the $38k account for depreciation recapture?

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No, thank you, there is four years of depreciation

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Harry Rex Vonner

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Metairie

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So I think we have enough information here to make some reasonable assumptions and see exactly how bad we should feel for you. Specifically, I'm going to assume that if you're from Metairie, that your rental is either in Metairie or nearby. In addition, if you have 4 years of depreciation, then that puts your property purchase in 2019. Since you didn't mention an prorated depreciation (i.e., bought mid-year), then that would put your purchase at the beginning of 2019.

Now using data from All-Transactions House Price Index for New Orleans-Metairie, LA , prices in this region of risen about 31.9% from Q1 2019 to Q4 2022. Using these gains and the $38k capital gains you mentioned, that would put a purchase price at a little over $119k. But I'll round up to $120k to make this easier (plus it allows for a little less gain than the rest of the area). Now let's just say you put 20% down ($24k) on this rental property and took out a 30-year mortgage. In January 2019, the 30-Year Fixed Rate Mortgage Average in the United States was 4.46%. But again we'll round up to 4.5%. So with a $96k 30-year mortgage at 4.5% the monthly payment is $486.42.

Now if you sell it after 4 years, you'll owe $89,365, and with a $158k sale, that's $68,635 in equity. Now in addition to the $38k in gains taxed at 15%, assuming your basis for the 27.5 depreciation schedule for a rental property was $120k, then that's $17,455 of depreciation recapture added to the $38k for $55,455. That taxed at 15% is ~$8,318. So subtracting that from the $68,365 of equity you have when you sell, that results in a net of $60,047 on an investment of $24k (downpayment, not including closing costs, but that would lower tax basis). That is a 150.2% gain over 4 years, or 25.8% annual rate of return. And this assumes you didn't have any rental income.

Now obviously it's difficult to determine rental income and costs based on what you provided, but using Zillow the price-to-rent ratio in your area is currently about 12.5%, or 8% of the value of a home. Starting with the $120k purchase price, that's a rental price of $800 per month. Seems reasonable enough. The costs are also difficult to determine, other than the mortgage amount of $468.42. Particularly though, according to Smart Asset, property taxes in Jefferson County are 0.59% annually. That seems ridiculously low ($708 on $120k), but I'll go with it. Which brings the cost the $527.42 monthly, or $272.58 net of rent. Now I really don't know what insurance or maintenance and repairs cost per month, but since depreciation is on a 27.5 month schedule and interest is front-loaded (about $348 per month), they are combined about $225 more than the actual mortgage payment. This means you can technically profit $225 per month and not pay a penny in taxes. Or if you profit anything less than that, you're saving on taxes.

Therefore, I think altogether a safe number for rental profit (after taxes), is $150 per month for a $120k property valuation, or 1.5% of the value. So now assuming rent is fixed every 12 months, but roughly increases annually at the rate of home prices (about 7.17% annually). That puts the 48-month total rent at about $8,012, or about $167 per month for 48 months. Now given the time value of money, and therefore, it would be inaccurate to add this to the profit at sale, and determine the annual rate of return over 4 years, which would have been 29.8%. So instead we need to account for the rental income when it occurs and calculate the money-weighted rate of return (MWRR or internal rate of return).

And using the above rental income and increases, and combined with the profit at sale, this puts your annualized MWRR at 32.8% AFTER your 15% capital gains taxes on a MEASLY $38k. So it's quite ironic that you're accusing others of "hurt feelings" while you're whining about a few taxes, while making an insane return on your investment, AFTER TAXES.

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I'm selling because I'm tired of renting to meth heads who don't pay their rent, and I'm ready to just bank the minimal profit and say frick it

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If this is a rental property why in the hell aren’t you doing a 1031 exchange? Buy something in a different area, possibly in a different category. I’ve done several 1031 exchanges with rental properties and it really helped me grow the value of my portfolio without paying capital gains taxes on properties.

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Hope you have not taken possession of the proceeds

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The OP has no idea why you would ask that question. Pure financial illiteracy.