Ocean Creek property has increased 52% but . . .
Read this before selling your Ocean Creek property
As you may already know prices have been soaring at Ocean Creek. If you bought in Ocean Creek, even as recently as a year ago, you are enjoying very nice appreciation in your property.
The Median Sales Price of Ocean Creek property has increased 52% from this same time period (last three months) over last year during the same time period
That is the median price of all Ocean Creek properties. The price of your Ocean Creek property may have increased even more. But with concerns of a future bubble burst and prices may drop back down, some sellers have reached out to me to ask about the best strategy for selling. Let me say first, that I named our company Dreamlife Realty because we specialize in helping individuals and families to live their Myrtle Beach dream life and for you Ocean Creek owners, specifically your Ocean Creek dream life. I never encourage any one to sell, unless their goals have changed or unless they have determined that their dream life is somewhere else now. Circumstances change. Life goals change. I also know that many Ocean Creek owners have multiple Ocean Creek properties, so for them, this could be the perfect time to sell their second OC property. I have also helped clients do this recently.
So, if you are in a place where you are considering selling your OC property, I encourage you to proceed with caution. Make sure you have a good strategy in mind that will help you retain as much of your gain as possible. The main concern you should be aware of right now in this market is capital gains tax. For the last fifteen years or so, this was not so much of an issue because appreciation was not that significant. Now, for most sellers, capital gains is a real issue because they are seeing much more appreciation of their Ocean Creek property.
If you are using your Ocean Creek property as your Primary Residence, I have really good news for you. You don’t have to pay capital gains if you live, or have lived in the property for at least 2 out of the last 5 years
What is a Capital Gain and how is this gain taxed?
The simple definition is that a capital gain is the profit made when an asset (your Ocean Creek property) is sold. That’s the easy part. The tricky part is determining exactly how much that is. It should be as simple as subtracting the sales price you receive from the price you purchased at, right? Wrong. It is unfortunately much more complicated than that. But if you play your cards right, the complexity of the situation could work in your favor. There are other factors involved in determining your capital gain on a sale.
How to determine capital gain, i.e. your profit . . .
First step, you must calculate your cost. In the accounting and tax world, they call this cost basis. Your cost only begins with the purchase price of the Ocean Creek property you bought, but it does not stop there. The good news is that you can add the other expenses involved with the purchase (i.e. your closing costs) such as attorney fees, title search, title insurance, courier fees, appraisal and inspection fees, etc.) This amount, called capital improvements, is added to your “cost basis” which will ultimately reduce your taxable profit (gain). Have you renovated your property by upgrading flooring, renovating kitchens and baths, or a changing out cabinets? If so, you can add the costs of these improvements to your “cost basis” thus giving you a higher floor to offset taxable profits when you sell. This is now your adjusted basis.
Examples of Capital Improvements
- Upgrading doors and windows
- Replacing heating and cooling systems, electrical, and plumbing
- New appliances, flooring, and roofing
- Real estate sales commissions
- Appraisal, legal, and inspection fees
- Title search fees, transfer taxes, and escrow and closing settlement costs
Depreciation Recapture
Now comes a curve ball. It is possible that your adjusted basis could be reduced. How’s that? Well, if you have been renting your Ocean Creek property then you most likely have been claiming depreciation on the property year after year on your tax returns (if unsure, check your Schedule E on last year’s tax return). The depreciation schedule provided by the IRS tax codes allows you to depreciate the value of the asset, your Ocean Creek property, over a 27 ½ year time period. So if you have owned your property for 13 years or so, and rented your property out for vacation rentals, then you have likely already depreciated half of your cost basis up until now. When you sell your property the depreciation you have taken reduces your cost basis by that amount. The IRS call this Depreciation Recapture.
Don’t get too bogged down or depressed reading this. There could be some good news for you further down below
Calculations (continued)
Remember, lowering the cost basis means a higher profit that can be taxed. However, if you have used your Ocean Creek property as a second home, you can stop looking for last years tax returns. Your cost basis has unlikely changed.
So once you know your adjusted cost basis, you now have the number from which to subtract from the sale of your property if you decide to sell it. You can then further reduce the taxable profit by subtracting the costs associated with selling your property. Those would be deed stamps for transferring the property, attorneys fees, other miscellaneous fees, and the hard earned and well deserved commissions paid Dreamlife Realty for marketing, promoting, and getting you top dollar for your Ocean Creek property ?
How Capital Gains are taxed …
There are two types of Capital Gain. Long term and Short Term. For the purposes of this scenario, let’s assume that you are dealing with a long term capital gains issue because you have owned your Ocean Creek property for more than one year. This takes you into the long term capital gains territory, and good for you because this is taxed at a lower rate.
Here are the current federal capitals gains rates:
- 0% for personal incomes of up to $40,400
- 5% for personal incomes of between $40,401 to $445,850
- 20% for personal incomes of $445,850 or higher
So let’s put this all together and use an example to see how the tax calculation would work
Scenario:
You bought a 2 bedroom lodge for $120K eight years ago. Your closing costs were $5K and you added $20K in renovations. You sell it today for $230K.
- Adjusted basis = $145,000 ($120K + 20K + 5K)
- Net sales price = $214,000 (after closing costs and commissions)
- Depreciation recapture = $36,000
- Taxable Gain = $69,000 + 36,000 = $105,000
- Capital gains tax due (15% at mid-range capital gains tax rate) = $15,750
I have more news, good and bad. So let’s start with the bad and end with the good news. Not only would capital gains be taxed by the Federal government (IRS) but the South Carolina Dept of Revenue is going to want their share too. They will tax you an additional 7%. So that is an additional $7,350.
Federal Capital Gains Tax ($15,750 ) + SC Capital Gains Tax = $23,100
That was the bad news, now here is the GOOD NEWS …
If your Ocean Creek property was used as a vacation rental and meets the IRS qualification as such, then there are
4 basic ways to avoid capital gains tax on the sale.
- Purchase properties using your retirement account
- Convert the property to a primary residence
- Use tax harvesting
- Use a 1031 tax deferred exchange
This article has gone on way longer than I anticipated, and if you are still with me, you are a trooper for reading along this far.
So let me end with this . . . I invite you to contact me and I can explain in more detail how these four techniques work by knowing more about your personal situation. I would be happy to help co-create a plan that works best for your scenario.
** Disclaimer **
I am not a CPA nor legal tax advisor. This should not be construed as tax advice. I am merely sharing with you some scenarios, concerns, and issues that my clients are and have dealt with. So if you are considering selling and cashing in on the appreciation of your Ocean Creek property, I encourage you to go in with your eyes wide open and with a plan that will help you reach your ultimate goals. I would love to hear from you. You can reach me at the contact information below
Clay Adams
clay@dreamlifemail.com
(843) 360-2728
