Archive for May, 2019

Taxes You Need to Pay When Selling Your Rental

Thursday, May 30th, 2019

Taxes – UGH! Unless you’re an accountant with a love for numbers, the word probably brings with it a feeling of dread when you hear it. Some folks pay them annually to the IRS. Others must pay them quarterly. And we all get to pay them daily when we purchase stuff. Like death, they cannot be avoided! And if you’re selling your rental, there are a couple tax basics you should know. First, your rental is a business asset. So the taxes you need to pay on it are due only when it sells at a profit. But if your rental sells at a loss, you can write off the loss to offset taxable income. The key to knowing the taxes you need to pay is found in correctly calculating the amount of gain or loss on the rental you sold.

How a Profit or Loss is Determined

Your profit or loss is determined by subtracting your property’s adjusted basis on the date of sale from the sales price you receive (plus expenses, such as real estate commissions).

To understand your property’s adjusted basis, you must first know what “basis in property” and “adjusted basis” mean. Basis in property is the amount of your total investment in a property. And it is not fixed. It changes over time to reflect the true amount of your investment. Each change or new basis is called the adjusted basis.

Taxes You Need to Pay When Selling Your Rental Property at a Profit

When you sell a rental property at a profit, you pay taxes on the gain (profit) you realize (earn). These taxes are called Capital Gains Tax.

Reductions in basis increase the gain or profit you realize and therefore increase your tax liability when you sell your rental.

Taxes You Need to Pay When Selling Your Rental Property at a Loss

If you sell at a loss or lose money, you’ll be able to deduct the loss, but not without being subject to important limitations.

Increases in basis are lower your tax liability because they lower your profits.

Here’s an example from Nolo.com:

Viola bought a small apartment building and sold it six years later for $300,000. Her starting basis was $200,000. During the time she owned the property she took $43,000 in depreciation deductions and paid $13,000 for a new roof (an improvement). Her depreciation deductions reduced the property’s basis, but the roof improvement increased it. Her basis at the time of the sale is $170,000. Viola calculates her taxable gain on the property by subtracting her adjusted basis from the sales price: $300,000 – $170,000 = $130,000.

As you can see, when you sell your property, you effectively give back the depreciation deductions you took on it. Since they reduce your adjusted basis, they increase your taxable gain. Thus, Viola’s taxable gain was increased by the $43,000 in depreciation deductions she took. The amount of your gain attributable to the depreciation deductions you took in prior years is taxed at a single 25% rate. Viola, for example, would have to pay a 25% tax on the $43,000 in depreciation deductions she received. The remaining gain on the sale is taxed at capital gains rates (usually 15%, 20% for taxpayers in the top tax bracket).

How to Avoid Taxes You Need to Pay When Selling a Rental Property

Rental properties generate a respectable profit each month, provided you choose the right rental properties. But they can cost you when you sell. Here are three strategies that help ease the burden of a significant tax bite when you sell a profitable rental.

  1. Offset gains with losses
  2. Take advantage of Section 1031 of the Tax Code
  3. Turn your rental property into your primary residence

Offsetting gains with losses through tax-loss harvesting is for those with capital losses in a given tax year. This strategy allows a landlord to subtract those losses from the capital gains from the sale of their rental.

Taking advantage of the IRS Section 1031 “Like-kind” exchange is for those who are able to reinvest the proceeds of selling their rental property in new real estate. This strategy allows them the ability to defer some or all of the taxes on the capital gain.

Converting your rental property into your primary residence is for people who want to do so for better tax treatment when they sell. Landlords who convert a rental into their home to live in are able to exclude as much as $500,000 in capital gains from taxes.

Hire the Right Financial Advisor

When it comes to investments and knowing what taxes you need to pay on the sale of a rental, it’s always best to find and hire the right financial advisor. And it doesn’t have to be hard to find one who fits your needs. SmartAsset offers a free tool to match you with fiduciary financial advisors in your area in five minutes.

Hire the Right Real Estate Agent

If you’re selling a rental property, contact Charles D’Alessandroyour Brooklyn Real Estate Agent with Fillmore Real Estate. Call (718) 253-9600 ext.206 or email [email protected] With 30-plus years of real estate experience in Brooklyn, he can help you with all your real estate needs.


Charles D’Alessandro
Your Brooklyn Real Estate Agent
718-253-9600 ext. 206
[email protected]

What Do You Need to Know About Rent Back Agreements?

Wednesday, May 15th, 2019
Rent Back Agreements can be advantageous to both buyers and sellers providing they are utilized judiciously.

Ever hear of rent back agreements? So what are they, and what are the advantages and disadvantages associated with this kind of real estate transaction?

Rent Back Agreements Defined

Wikpedia defines rent back agreements as “a form of property transaction involving the expeditious sale of an owner occupier’s residence to a landlord or property company and renting it back from the new owner.” They are also known as post-settlement occupancy agreements.

This kind of transaction allows a home seller to buy himself extra time to stay in the home after closing.

And why would a home seller need extra time beyond the closing date to stay in the home?

Rent Back Agreements Explained

Here are a couple of home sale stories to help explain what rent back agreements are.

The Story of the Brownstone

My wife and I paid a builder to build a getaway home outside of New York City limits. And now our builder is nearing completion.

We put our brownstone up for sale as soon as the builder broke ground, assuming that it could be on the market for a little while. But guess what? Our custom home isn’t quite finished, and we already have a buyer for our brownstone.

The buyer has come to an agreement on a reasonable closing date with us since our new home is almost built. But again, guess what? As our closing date approaches, the builder has informed us of a major delay. This snag is going to keep us out of our new home for another 30 days past the closing date.

So what can we do? We know the buyer wants to move into their brownstone on closing day. Wouldn’t you? Of course you would!

The Story of the Offer Too Good to Refuse

My friend was selling her condo. And it wasn’t long before she received a very attractive cash offer that was just too good to refuse. The cash offer, however, came with a very short time until closing. She expected and planned on having more time to find a new place to live. But she knew she couldn’t turn down the buyer’s cash offer.

So there she was, cash in hand and no home to move into at closing time. What could she do?

Benefits of Rent Back Agreements

In both of the stories, the sellers ended up with no place to go on closing day. And in both cases, their real estate agents proposed rent back agreements.

In the case of the condo seller, her buyer was an investor who was planning to rent the condo out anyway. And he readily accepted. For 40 days past the closing date, she paid a daily rate that was equivalent to her mortgage payment plus the condo fee.

Benefits for the Seller

  • Allowed to stay in the home until a specified date past closing
  • Able to put things together to close the deal (if used properly with the appropriate language inserted in the addendum to the contract)

Benefits for the Buyer

  • Extra income can offset mortgage payments and some closing costs, such as broker commissions, appraisal fees, and attorney fees
  • Agreeing to a rent back gets your offer accepted in multiple offer situations in most cases

Benefits for Both the Buyer and the Seller

  • Minimizes stress for everybody involved by wrapping the rent into the closing and delivering it as a single payment
  • Used judiciously, it’s a win-win for all parties

Before Agreeing to Rent Back Agreements

Before agreeing to rent-back agreements, think carefully about the terms. Spell out the details for the record to avoid misunderstandings.

  • Understand why the seller wants a rent-back agreement
  • Charge a fair price
  • Don’t sign a lease that lasts longer than 60 days
  • Charge a holdover fee if the seller stays longer than agreed
  • Collect a security deposit
  • Require renters insurance

Most people do their best to plan ahead. But life happens. When a seller gets an offer with a proposed settlement date, they might ask, “Now, how am I going to coordinate getting out of this house and into another without having movers lined up in the driveway?”

Take note: Rent back agreements should be treated the same as you would treat any other business relationship. Buyers, never let the sellers retain possession of the home without drawing up a formal occupancy agreement, never. Because with terms and conditions of the seller’s stay in the buyer’s new home, both parties are protected.

Have you ever needed rent back agreements? Did a real estate agent you were working with suggest using a rent back agreement? There’s a lot that goes into a good rent back agreement. And in order for it to do its best work for both parties, it must be used properly. I recommend consulting with a real estate lawyer for more information.


 Charles D’Alessandro
Your Brooklyn Real Estate Agent
718-253-9600 ext. 206
[email protected]