Selected Tax Issues for Investment Property Owners William T. Hurley, Jr., JD, CPA

Selected Tax Issues for Investment Property Owners Potential Sellers Potential Purchasers / Holders

Potential Sellers Ownership of appreciated property can create tax paralysis Rental Real Estate – just another investment asset class

Should You Sell or Hold – Issues to Address Income Taxes Cash Flow Rate of Return Investment Diversification Efficient Use of Capital How Much Has The Property Appreciated?

Types of Tax Capital Gain Long-term Short-term Depreciation Recapture Medicare Tax on Net Investment Income in Excess of $250,000 Alternative Minimum Tax

Current Tax Rates on the Sale of Investment Property Federal Long-term Capital Gain Rates for Married Taxpayers 0% on Taxable Income up to $74,900 15% on the next $389,950 20% on Taxable Income Greater Than $464,850 Massachusetts Long-term capital gain – 5.15% Short-term capital gain – 12%

How Do You Decide Whether to Sell or Hold? Objective Analysis Do the math – See the Example Subjective Analysis Market Risk Tenant Risk Repair and Replacement Risk Investment Diversification Risk

Cash Flow & Pro Forma Sale Schedule Example Facts: Multi-Family Property – 2 Units Example 1 Example 2 Original Purchase Price Building $ 275,000 $ 275,000 Land 65,000 65,000 Total Cost 340,000 340,000 Depreciation Taken 200,000 275,000 Cost Basis for Property Sale $ 140,000 $ 65,000 Mortgage Principal Outstanding $ 135,000 $ -

Cash Flow & Pro Forma Sale Schedule Rental Income and Cash Flow Example 1 Example 2 Rental Income - $2,300 per Unit $ 55,200 $ 55,200 Cash Expenses – Estimate (25,000) (25,000) Depreciation (10,000) - Net Income/(Loss) 20,200 30,200 Cash Adjustments Depreciation 10,000 - Mortgage Principal Payment (11,000) - Net Annual Pre-Tax Cash Flow $ 19,200 $ 30,200

Cash Flow & Pro Forma Sale Schedule Pro Forma Sale Results Example 1 Example 2 FMV $ 850,000 $ 850,000 Adjusted Cost Basis (140,000) (65,000) Pro Forma Gain/(Loss) $ 710,000 $ 785,000 Taxes That Will Be Owed Federal $ 150,000 $ 172,000 Massachusetts 37,000 40,000 Total $ 187,000 $ 212,000 Effective Rate 26.338% 27.006%

Cash Flow & Pro Forma Sale Schedule Pro Forma Cash Flow From Sale Example 1 Example 2 Sales Proceeds $ 850,000 $ 850,000 Income Taxes To Be Paid (187,000) (212,000) Estimated After-Tax Cash Flow $ 663,000 $ 638,000 Cash Flow From Rental Property $ 19,200 $ 30,200 Replacement Rate of Return 2.896% 4.734% This is the investment return that would be needed to replace the rental property cash flow.

Other Issues to Consider Cost Segregation   Tangible Property Regulations Like-Kind Exchanges