Sell­ing rental prop­erty may have tax im­pli­ca­tions

Sun Sentinel Broward Edition - Homespot - Broward East - - CONDO & H.O.A. LAW - By Ilyce Glink and Sa­muel J. Tamkin

Tri­bune Con­tent Agency Q: Ihavea rental prop­erty that I paid $100,000 for, and I am­go­ing to sell it to my daugh­ter for the same amount. I’ll fi­nance the prop­erty for her.

She wants to live in the prop­erty for two to three years as her pri­mary res­i­dence. If she sells the prop­erty af­ter two years for more than $100,000, will she have to paid cap­i­tal gain tax?

Also, will I have any in­crease in taxes when she sells the prop­erty and I get paid the re­main­ing bal­ance of the loan? A:

When you sell your rental prop­erty, the IRS will re­quire you to re­cap­ture any de­pre­ci­a­tion you’ve taken over the years at a rate of 25 per­cent. You’ll need to do that by April 15 of the year fol­low­ing the sale. So if you sell the prop­erty to her in 2016, you’d need to re­port the sale on your fed­eral in­come tax form filed April 15, 2017.

If you’ve owned the prop­erty for a short pe­riod of time, the re­cap­ture tax may not be so much. You need to un­der­stand that when you own in­vest­ment real estate, you may be able to get a tax ben­e­fit. You can deduct the cost of in­ter­est on any loan, the cost of real estate taxes, in­surance, re­pairs, etc., and you also can de­pre­ci­ate the value of the build­ing. If the value of the prop­erty is $100,000 and the land value is $20,000, you can de­pre­ci­ate the $80,000 over 27.5 years or about $2,900 per year.

So without do­ing any­thing, the $2,900 de­pre­ci­a­tion per year low­ers the amount of taxes you might pay on prof- its you may have on your tax re­turn by about that amount. It gets quite com­pli­cated, but in essence, de­pre­ci­a­tions can help lower your in­come taxes ev­ery year. But when you sell the prop­erty, the IRS ex­pects to get re­paid for the ben­e­fit you re­ceived from the de­pre­ci­a­tion by tax­ing you at about 25 per­cent on the de­pre­ci­a­tion you took. So if you took three years of de­pre­ci­a­tion or about $8,700, you’d have to re­pay the IRS about $2,200 when you sell the prop­erty.

To make this loan le­git­i­mate, you’ll need to do an “arm’s length” trans­ac­tion and charge your daugh­ter some real amount of in­ter­est. Be­cause in­ter­est rates are so low, you should be able to set up the loan at 2 or 2.5 per­cent in­ter­est, which is what many banks are charg­ing. The IRS has a ta­ble of in­ter­est rates you can use to de­ter­mine the low­est in­ter­est rate you can charge without caus­ing an is­sue for you or her on your fed­eral in­come tax re­turns.

You could also give the prop­erty to your daugh­ter. If you give it to her, she’ll re­ceive it at the $100,000 price you paid for it. But by mak­ing it her pri­mary res­i­dence, she’ll be en­ti­tled to keep up to $250,000 in prof­its tax-free when she sells, as long as she lives in it for at least 24 months which, as we un­der­stand it from your let­ter, is the plan.

This might be the sim­plest thing to do, since you won’t have to hire some­one to write and file loan doc­u­ments for you. What you should do, how­ever, is work with a real estate at­tor­ney to fa­cil­i­tate the trans­fer so that it is han­dled cor­rectly. (By the way, we’ve as­sumed you no longer have a loan on the prop­erty. If you do, it could com­pli­cate things a bit, since the loan gen­er­ally will pro­hibit you from trans­fer­ring own­er­ship without re­pay­ing the loan.) You’ll have to de­cide whether sell­ing the prop­erty to her or not is right for you and her. Ilyce Glink is the cre­ator of an 18-part we­bi­nar and ebook se­ries called “The In­ten­tional In­vestor: How to be wildly suc­cess­ful in real estate,” as well as the au­thor of many books on real estate. She also of­fers in­for­ma­tion on her YouTube chan­nel. (youtube.com/ user/Ex­pertRealEs­tateTips).

Con­tact Ilyce and Sam through her web­site, ThinkGlink.com.

© 2016 Ilyce R. Glink and Sa­muel J. Tamkin. Dis­trib­uted by Tri­bune Con­tent Agency, LLC.

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