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

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

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

3. 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?

4. 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

5. 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%

6. 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

7. 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 Total Cost 340, ,000
Depreciation Taken 200, ,000
Cost Basis for Property Sale $ 140,000 $ 65,000
Mortgage Principal Outstanding $ 135,000 $ -

8. 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
Cash Adjustments
Depreciation 10,000 -
Mortgage Principal Payment (11,000) -
Net Annual Pre-Tax Cash Flow $ 19,200 $ 30,200

9. 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, , Total $ 187,000 $ 212,000
Effective Rate % %

10. 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 % %
This is the investment return that would be needed to replace the rental property cash flow.

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