Archives for June 2019

The Depreciation Factor When Selling Your OBX Beach Home

In the height of the real estate boom from 2002 to 2006, doing a 1031 Tax Deferred Exchange
was such a common occurrence. We think about it a lot more in a rising market. However,
even though the Outer Banks market is still in recovery mode, a 1031 exchange may still be a
very necessary process, even without massive profits from actual sales price. All due to one
word…depreciation.

Specifically the way it works is the gain, not the profit or equity, from the sale of your
investment/beach/second home could be subject to Federal and State taxes. Also subject to
federal taxes at the time of sale is the depreciation taken over several years on the property.
That amount is taxed at a whopping 25%!!! This could really sneak up on you!

Below is an example of how to determine a potential capital gain when selling without an
exchange.

Step 1: Calculate the Basis
$300,000 Original Purchase Price
+ $ 50,000 Improvements that haven’t been expensed in a previous tax year
– $ 60,000 Depreciation taken
$290,000 Net Adjusted Basis

Step 2: Calculate Capital Gain
$475,000 Sales Price today
– $290,000 Net Adjusted Basis
– $ 25,000 Cost of Sale (commissions, transfer tax, fees, etc)
$160,000 Realized Capital Gain

Step 3: Calculate Capital Gain Tax Due
$15,000 Recaptured Depreciation = 25% x Depreciation taken
$24,000 Federal Capital Gain Tax at 15% x Realized Capital Gain
$32,000 Federal Capital Gain Tax at 20% x Realized Capital Gain

Please Note:
* Income less than $39,375, the long term capital gains tax rate is zero
* 15% if income is less than $434,550 20% if income is more than $434,550
* This does not include any potential state capital gain taxes

What can you do if you want to sell and avoid paying Federal Capital Gains Tax?
– You can defer the federal tax by performing a 1031 exchange for a property of equal or
more value than the property you are exchanging, and acquiring the same.
debt/mortgage equal to or exceeding the debt on the relinquished property.
– You can move into the home and make it a primary residence for 2 of the last 5 years
and rollover up to $250,000 if single and $500,000 if married.
– You can reduce tax liability by doing some major improvements that are not expensed in
any previous tax year.

This is an overview of the process. For more detailed information on your specific tax
implications contact a tax professional. To find out more about doing a 1031 Tax Deferred
Exchange we recommend Realty Exchange Corporation at www.1031.us.

Although it sounds reasonable to think with all the guests coming, it would be better to just sell the home in the fall or spring, take a look at these six (6) reasons you could be missing out by waiting. Contact me today if you want more information!

1. Outer Banks Inventory

Inventory has been our biggest challenge in terms of pricing.  June, July, and August are historically the time of year when our inventory is the lowest.  Why not take advantage of that incredible opportunity? Lower inventory could mean higher prices.

2. High Volume of Visitors

The Outer Banks will have over 3 million visitors each year.  Obviously, the majority of those folks visit during the summer months.  We cannot get that kind of exposure any other time of year!

3. Perfect Time of the Season

The home is fully open and operational.  Buyers will have inspections done before closing.  When the house is winterized during the fall/winter there are extra costs to open the house back up for those inspections.  Right now, everything is up and running and easy to inspect and ensure to the buyer the home is in good condition.

4. Sweet Outer Banks Summertime

It’s a beach house!  When does the beach look the best?  Summertime of course. Your beach house will show the best with the sun shining, deck chairs out, pool open, hot tub running!  Buyers get excited about these things and it helps to sell your home.

5. Serious Inquiries

Buyers this time of year are serious about buying!  If a potential buyer is going to take time out of their much-anticipated vacation to look at your home, it means they are serious about buying.  They’re here with all decision makers too.

6. Outer Banks Rental Income & Fees

With the average transaction taking 45 to 60 days to close, sellers can collect most or even all of the rental income.  A late summer or early fall closing also means sellers don’t have to worry about fall maintenance and carrying the home through the winter months.