patrick.net

Here it goes:
$420K - $406K + depreciation - selling costs = profit.
Assuming no major renovations.

Here's my estimate:

Keep from sale = 420K - 6% - 2% (country / state tax) - 0.15x200K/27x4
Keep from sale = 420K - 25K - 8K - 4K = 383K

Amount owed = $285K
Cash back = $98K

Did I forget anything?

Did I forget anything?

Depreciation was based on $259K / 27.5yrs = $9.4K/yr.

So total depreciation taken was $9.4K * 4yrs = $37.6K.

How does that change things above?

My calculation of depreciation was based on 200K value of structure. If you change it to 260K, then the tax on depreciation is 0.15 times 37.6 = 5.6K instead of the 4K I estimated, so take home would be about 381K and cash back would be 96K.
I estimated the 2% county/state tax. You could get a copy of a local closing statement (HUD1) to see what the taxes/fees are.
Are you sure about the 15% part? If they make enough money, it could be 20%. I'm not sure if it would have other tax implications either. It could make some deductions no longer available or something like that, so the impact on taxes might be different from the nominal capital gains rate.

Here is how I see it:

My accumulated depreciation is $37,600 over 4yrs: ($259,000 / 27.5) x 4yrs

So then the net adjusted basis is $406,000 - $37,600 = $368,400

The Capital Gains is $420,000 - $368,400 = $51,600

The depreciation recapture is 25% of 37,600 = $9,400

The capital gains tax is 15% of $14,000 = $2,100

Realtor commission = $420,000 * 0.06 = $25,200

So total taxes due and realtor commission is $9,400 + $2,100 + $25,200 = $36,700

So the bottom line -> After tax and after costs, equity is $420,000 - $285,000 - $36,700 = *$98,300*

Please correct me where I may be missing something.

BayArea says

Please correct me where I may be missing something.

You got the depreciation / capital gains part right, where I had 15% for the whole thing. But you are forgetting county / state taxes that hit the seller during the sale. Those vary from location to location. That is why a HUD1 would be useful.

Two other things that might be an issue is the need to fix things and help with closing costs. Typically, an offer for 420K will be based on nothing coming up during an inspection. Normally, they will find some things and the buyer might want a few thousand worth of work done. Also, depending on the market, they might offer $420K but ask for $5K or something back to help with closing costs. The part about closing costs is not included in comps, but may be common in your market. When I bought my house, I asked for $8K back with an offer at the advertised price. There were no competitive offers, so the seller took that.

Thank you for the reply.

The property is in the heart of the Bay Area, so I don't expect that the buyer would be the one with the leverage.

I'd be pretty surprised if I had to make any concessions based on the multiple offer situations I've seen on the last few properties sold in the building. But who knows...

So, what you are missing is the property tax in the bay area.

BayArea says

My accumulated depreciation is $37,600 over 4yrs: ($259,000 / 27.5) x 4yrs

Where do you get 259,000? You depreciate on the total purchase price-closing costs+capital improvements.

Then you net out the basis (total purchase price minus depreciation) from the sale price for the gain.
IRS publication 523 explains this in detail and has a worksheet.

No idea why you are netting out the amount after the loan. Rent is ordinary income.

Bob, you don't depreciate land.

And rent has nothing to do with what I'm looking at since this is a sale situation.

BayArea says

Bob, you don't depreciate land.

Yes I know it's net of land, but the number sounded way out of line. Wow, almost 40% land. I'm not used to seeing anything like that. More like 20-25% in the markets I deal in. Which is why I was wondering where the number came from. Anyway pull up the worksheet in 523 and you will have the exact amount. .

your profit should be more than that due to the followings:

- do you have any carryover passive losses? (i.e rental losses you couldn't deduct last year). this reduces your taxable gain.

- you can add closing costs and cap ex too adjusted basis:
adjusted basis = sale price + closing costs + cap ex - depreciation

- you can deduct the commission from the taxable gain:
taxable gain = sale price - selling costs including commission - adjusted basis