Don’t Let Capital Gains Tax Deter You From Cashing Out on an Investment Property

According to the Census Bureau, our country has nearly 116M housing units for a population of 330M men, women, and children. Sixty percent of the housing units are single-family detached homes.

The National Association of Home Builders states that roughly 7M of the housing units (about 6%) are second homes or vacation homes not available to rent.   

The Census Bureau calculates there are 20M rental properties in the U.S., owned by 14.3M individual investors. According to www.AirDNA.co, there are 1.1M short-term rentals.

So, there are over 28M properties out of 116M that are either vacation homes, second homes or investment properties of some type.

The Colorado Association of Realtors reports that the number of second home sales has jumped 44% since the beginning of Covid in March 2020.  So, whether you own a vacation home, second home, rental home, or short-term rental condo, you own real estate subject to capital gains tax when you sell.

Many sellers of investment properties take advantage of the Sec. 1031 tax deferred exchange option, which allows the property owner to put your full proceeds, pre-tax, to work. 

Doing a 1031 exchange of real estate requires what’s called a “qualified intermediary” (or QI) and not the title company conducting the closing to hold your proceeds until you reinvest them, and the IRS allows 45 days to identify and 180 days to close on the replacement property. Sellers cannot “touch” the proceeds from the sale of your relinquished property. The QI must work with the title company to facilitate transfer of the proceeds to the new closing. If a qualifying replacement property cannot be closed within 180 days, that opportunity is lost and the gain will be taxable.

Unless the investment property is inherited at your death, there will be a capital gains tax liability. For some, the gain has been so significant that perhaps it’s time to pay the tax and laugh all the way to the bank with the remainder. Note: You cannot use the 1031 tax deferral strategy to sell or purchase a primary residence.

There are capital gains tax calculators online. Here’s one: https://smartasset.com/investing/capital-gains-tax-calculator

Here’s the IRS’s Fact Sheet for 1031 Exchanges: www.irs.gov/pub/irs-news/fs-08-18.pdf

To determine your tax exposure, start with the original purchase price. What did you pay for the property when you bought it? Second, add up all the money you put into capital improvements of the property. Then subtract depreciation which you took on your tax returns. The IRS considers investment real estate’s “useful life” to be 27.5 years. The cost basis of the property is the amount you paid, plus the cost of selling it – commissions, settlement fees, and closing costs, minus the depreciation taken.

An agent in our office calculated the following numbers for a deal he is doing and roughly calculated the net gain. His seller’s unit was purchased in 2016 for $275,000, netted the owner $10,000 per year in passive income, enjoying a 61% profit in just six years, after tax. The lucky owner paid the tax man and was left with roughly $377,000 in cash after everything was deducted. Discuss your particular situation with your CPA if you have one, and, if not, I can recommend a local firm. These figures are round numbers and for the purposes of this article.

I believe in paying taxes. It is pothole season and street crews are at work. Fireman are on call and the police are vigilant. Our national defense is strong, and we live in the most prosperous nation in the world where wealth can be created simply from smart investing. Be proud, as I am, to pay your taxes, for you made a lot of money in a beautiful place called Colorado.

Austin Pottorff, who deals more than I do with investors, helped with the research for this article.  He has two development sites listed at this time. See them at www.GoldenDevelopmentSite.info and at www.LakewoodDevelopmentSite.info.

If Energy Efficiency in Your New Home Matters to You, Call Us.

One of the two value statements on our yard signs (see logo above) is “Promoting and Modeling Environmental Responsibility.”

If you’re a buyer wanting to assess the energy efficiency of the homes you are looking at, you owe it to yourself to hire one of our agents to represent you and show you homes, because we know this topic better than most real estate agents.

In addition to pointing out how sustainable the houses we show you are, our inspectors “speak green” too, and, as a summer special, we are giving buyers who hire us a Free Energy Audit as a closing gift. Call me at 303-525-1851 or email Jim@GoldenRealEstate.com.

Meet Our Broker Associates and Me at the Farmers Market in Golden June 17th

Every summer, Golden Real Estate gets a “showcase” booth at one of the farmers markets held in downtown Golden, and Saturday, June 17th, is our date this year.

Bring your questions about real estate, or simply come to say “hello.” We’ll have our laptops online so we can even help you look at homes and set up an MLS email alert matching your search criteria.

You’ll get to enter a drawing for a $100 gift certificate to a Golden restaurant. And bring your reusable bags — Golden’s is one of Denver’s top-rated farmers markets!

We’ll be there from 8 a.m. to 1 p.m. The market is in the parking lot next to the Public Library on 10th Street in downtown Golden.

We Welcome Broker Associate Kathy Jonke to the Golden Real Estate Team

Kathy, who lives in downtown Golden, joined our brokerage this week. We’re no longer an all-male brokerage!

She was born and raised in Wheat Ridge. With her degree in Geology and Earth Sciences from the University of Colorado at Boulder and her career with the U.S. Forest Service in geophysics, she relocated often, which gave her the opportunity to renovate houses and historic commercial buildings, and also to design and build new homes. Her passion for real estate led Kathy to become a real estate broker, and she loves helping people navigate the buying and selling process in the local Golden market.

Kathy settled in Golden five years ago and had a home built in the 9th Street historic district. She is active in the community, where she volunteers with her friend Judy Denison (who I featured recently) at the International Rescue Committee. She also serves on the City of Golden’s Historic Preservation Board. 

Welcome aboard, Kathy! We’re excited to have you on our team!

New 3-BR Home Near Downtown Golden Just Listed by David Dlugasch

 This home at 1004 4th Street is truly one-of-a-kind. There are magnificent views of North and South Table Mountain from the floor-to-ceiling windows on the main level. It was just listed for $1,995,000. You are within walking distance to downtown Golden with its famous shops and restaurants. This is a 4-BR, 4-bath home on a corner lot. The wide-open main level floor plan is great for entertaining, or just appreciating the fabulous views and staying cozy near the gas fireplace. The state-of-the-art kitchen is a chef’s delight. It has a 6-burner stove with an additional griddle and double oven. The refrigerator is oversized, and there is a walk-in pantry. The primary suite has a spa-like feel with a walk-in steam shower with 3 shower heads. There are 2 sinks with quartz counter, a soaking tub an extra-large walk-in closet. The upper level has two bedrooms, and a tiled 3/4 bath. Outside the bedrooms, there is a wide-open bonus area with desks, bookshelves and fantastic views. Above the 2nd floor a rooftop office/reading room that opens to a private roof-top deck. The lower level could be used as a mother-in-law living space with its extra-large bedroom with a walk-in closet, large living area with a wet bar, and its own private patio. Included is a one-year builder warranty. Take the narrated video tour and find more details and still photos at www.NorthGoldenHome.com, then come to David Dlugasch’s open house this Saturday, June 17th, 11 am to 2 pm. Or call him at 303-908-4835 to set a private showing.

Survey of 2,500 UK Households With Heat Pump Heating Systems Showed 81% Satisfaction Level

Because of their higher fossil fuel costs, other countries are far ahead of the United States in the adoption of home electrification, including for heating. The United Kingdom is one of them, and The Guardian recently reported on a survey of 2,500 UK households that made that switch. I’m not aware of a similar survey here, where there may not be enough heat pump households to do a proper survey.

HVAC contractors here in America have been slow to offer or recommend the replacement of gas forced air and gas boiler heating systems with heat pumps, mostly because they are unfamiliar with them. When a homeowner needs to replace their current HVAC system, the vendor who has been servicing their system is most likely to recommend replacing it with a “newer, more efficient” model. So far, I have found only one company which installs and services both traditional gas-fueled heating systems and electric heat pump systems — always recommending the latter. That company, which I have mentioned previously, is Sensible Heating & Cooling, 720-876-7166.

Below are some key excerpts from The Guardian’s article. Click here for the full article.

The survey of more than 2,500 domestic heat pump owners and more than 1,000 domestic gas boiler owners in England, Scotland and Wales over the last winter is thought to be the largest investigation into how households have responded to date….

Households have been slow to take up government vouchers worth £5,000 to help cover the cost of replacing a gas boiler with a new heat pump. Slightly more than a third of the scheme’s grants were taken up in the last financial year.

However, the survey, which was undertaken by Eunomia Research and Consulting, found that 81% of households were     as satisfied or more satisfied with heat pumps compared with previous heating systems, including gas boilers, electric heating, or oil and LPG boilers….

On running costs, which is another key area of concern for households considering a heat pump, the survey found that two-thirds of heat pump owners and 59% of gas boiler owners were satisfied even without extensive energy efficiency upgrades….

“The government should now have the confidence to move forward quickly with its proposal   to.… streamline out-of-date planning rules to make it easier and cheaper for everyone to make the switch to cleaner, safer and more efficient heating with a heat pump,” [said Clem Cowton, director of external affairs for Octopus Energy, a local energy supplier.]

Renewables Surpassed Coal & Nuclear for First Time in 2022

Since 2007, the use of coal for electricity generation has generally been in decline, while the use of renewables has been on the rise. Electricity generation from nuclear had remained relatively flat over the last two decades but has experienced a slight decline in recent years. In 2022, net generation of electricity from renewables reached 0.91 billion megawatt-hours, topping both coal and nuclear (0.83 and 0.77 billion megawatt-hours, respectively). In 2022, renewables accounted for about 21% of all net generation of electricity.

Notes:

Renewable sources of power include wind, solar, hydropower, biomass, and geothermal energy. “Other” category includes petroleum liquids, petroleum coke, batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, miscellaneous technologies, and electricity generated from non-renewable waste.

Electricity net generation is the amount of gross electricity a generator produces minus the electricity used to operate the power plant.

Source: U.S. Energy Information Administration

Are You Interested in or Curious About Cohousing?

Cohousing is an intentional, collaborative neighborhood that combines private homes with shared indoor and outdoor spaces designed to support an active and interdependent community life.

Here in Jefferson County and Denver, we have several successful cohousing communities, including Harmony Village, a 27-unit townhome community in Golden, and Hearthstone Cohousing, a 33-unit townhome community built on the former Elitch Gardens site in northwest Denver. Both communities have common houses for group meals and other community activities. The common houses also have guest apartments that members can rent for visiting guests.

Cohousing communities like these are self-managed. Members pitch in to help with community chores. Typically, everyone knows each other by name. It’s all about being in community.

That doesn’t interest most people, but if it interests you, you can join Women in Sustainability and CohoUS on June 14th, 5 to 8 pm at Hearthstone Cohousing’s common house, 4700 W. 37th Ave., Denver, for a discussion and networking event. Attendees can take a tour of the complex starting at 5pm. At 6:30pm, there will be a short talk from CohoUS executive director Trish Becker-Hafnor, followed by a discussion of what it means to live in a cohousing community, myths about cohousing, and how cohousing benefits the environment.

I wrote about cohousing in my Dec. 29 column, which you can read at www.JimSmithColumns.com.

Trish Becker-Hafnor gave a TEDx Cherry Creek talk about co-housing. Here’s the link: https://www.ted.com/talks/trish_becker_hafnor_cohousing_the_future_of_community_and_human_connection/

Take Advantage of Our Free MLS Neighborhood Alerts

We have two tools for making you a market expert in your neighborhood. First  we can send you a Neighborhood Market Analysis. Second, we can set you up to receive an MLS Email Alert when a home in your neighborhood is coming soon, active, goes under contract, or closes. Send your request to Jim@GoldenRealEstate.com.

Littleton Ranch With Hi-Tech Features Just Listed by Chuck Brown

Remodeled in 2016 and again in 2020, this home at 3 Meadowbrook Road is located on a 0.61-acre lot in the quiet Ridge View neighborhood at the end of a cul-de-sac and just steps from Lee Gulch Trail with access to the High Line Canal trail. Chuck Brown just listed it for $1,589,000.  This expansive light-filled home has five bedrooms and four baths, an open floor plan and a chef’s kitchen. The stainless steel 6-burner Thermador range with double oven and the Thermador refrigerator complement the dramatic 12’x4’ island, making food prep and hosting a breeze. The tranquil primary suite features an extraordinary newly remodeled bathroom which includes radiant floor heating, marble vanities and floors, custom wood cabinetry, and many other features too numerous to mention. Additional amenities include a professional grade wired and wireless internet, Sonos system throughout, and home theater. The backyard features expansive park-like grounds with a covered patio perfect for entertaining. The newly remodeled garage accommodates two cars, and has a lighted workbench, cabinets, wall storage, EV charger, epoxy flooring and ceiling-mounted storage racks. View the narrated video tour below, then visit www.LittletonHome.info, where there are lots of magazine-quality photos and a second video tour of the home technology features of this home. Then come to the open house on Saturday, June 10th, from 11am to 2pm.