strategy for investment property
My neighbor recently died and we have put in a bid to buy her house.
My husband is a contractor and my two sisters are going to go in
on the house with us. My husband and I have had a rental house for
five years as well. We plan to update the neighbor's house and add
a master bath and bedroom in the upstairs attic.
We are using a HELOC for our financing split three ways between
my two sisters and us. I am wondering if we are better off spending
a year to rehab the house and sell it next summer (we would then
be paying 8 percent interest on the $300,000 loans for a year),
or would we be better off to fix it up quicker and sell it as soon
as we can? I thought I read that if you hold a property for a year,
your capital gains tax is less. Can you tell me what the difference
in tax is?
We will do high quality work either way, but financially,
please give us any advice you might have on the best method. We
want to do it right the first time. Thanks for your time.
You can usually cash out $100,000 from your home,
use the proceeds for any purpose and deduct the interest on the
home equity line of credit as an itemized deduction. This means
you and your sisters, if already itemizing deductions, will get
an additional tax benefit from the borrowing.
There is a significant tax difference when you sell
the property after a year as opposed to selling it within one year
of purchase. The maximum long-term capital gains rate of 15 percent
applies to gains realized from the sale of property held for more
than one year (i.e. one year and one day). Property held for less
than one year results in a short-term capital gain, which is taxed
at the same rate that applies to all your income.
For example, as a married couple, if your taxable
income is more than $61,300 before the gain, you can expect to pay
25 percent tax on short-term gains instead of the 15 percent long-term
capital gains rate. If your income is higher than $123,700, you'll
pay a higher rate, as shown in Bankrate's tax
rate table. The interest on the entire loan amount is $2,000
per month ($300,000 at 8 percent). You have to compare your cost
to the additional tax you would pay by not holding the property
for a year. Chances are that the tax will be higher than the monthly
Usually, when you construct property, you have to
divide your gain between long and short term, depending on the amount
completed within a year of sale. However, in your case, since you're
only remodeling existing property, this allocation should not be
necessary so that if you sell more than one year after construction,
all your gain on the property would qualify as long-term gain.
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