capital gains tax, renting vs. owning

From: ldavis@ix.netcom.com (Lynn R Davis)
Subject: capital gains tax, renting vs. owning
Date: Fri, 7 Aug 1998 15:11:12 -0500 (CDT)

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You wrote: 
>
>Date: Mon, 3 Aug 1998 22:20:36 -0700
>From: Marcia Cramer <meccles@nwlink.com>
>Subject: capital gains tax
>
>We just closed on the sale of a piece of land and have a capital gain on
>the sale.  Do we need to pay the tax now or can we wait until April 15?
>
>     Thank you.
>
>       Marcia

Marcia:

The answer is rather more complex than now or April 15th.  

If your tax withholding is not enough to cover the total income tax that you will owe 
next April, then you may need to either increase the withholding or pay additional 
estimated tax payments, due quarterly.  (Next due date is September 15th.)

It is rather complicated to figure out whether or not you need to do one of these 
things.  It depends upon (a) your estimated total taxes due, (b) how much you are 
having withheld, (c) what your income tax was last year, (d) how much your income is 
growing this year over last.  For example, you are usually safe if your withholding is 
100% of what you owed last year - but NOT if your income is over a certain amount THIS 
year!  

My advice is to call the IRS and ask them to send you the 1040-ES form.

Finally, if you find that your withholding totals will not be enough to keep you from 
owing a penalty, then the better choice is to increase withholding rather than make an 
estimated tax payment.  This is because the IRS considers withholding as having come 
in evenly through the year, even when it does not.  Otherwise, you may still not owe 
any penalty if you make a payment this quarter for the capital gains tax incurred from 
this quarter's sale, but you will likely have to explain the timing to the IRS and 
fill out a special form for that as well.

Lynn Davis
Fremont CA

>------------------------------
>
>Date: Tue, 4 Aug 1998 08:44:53 -0400 
>From: "Siedlecki, Mary T." <mts@rti.org>
>Subject: Home Ownership versus Renting
>
>For many years I have wondered whether it was financially smarter to
>purchase a home or to continue renting an affordable apartment that
>allows me to make tax deferred contributions to a pension plan.  As a
>renter, I am neither building equity nor reaping tax benefits.  However,
>as a renter, I believe I am able to save greater sums of money than I
>would otherwise and I have shown myself to be a disciplined saver.
>Also, although I have lived in this area for more than five years, this
>was not a given when I first moved to this area.  At this time, it is
>much more of a given.  Any comments would be appreciated.  

Mary:

I believe that a lot of questions come to play in that.  One is the relationship 
between home purchase prices and rents in your area.  Another is any personal 
preferences between apartment and house living (although you can also rent a house). 
Another is the question of how long you plan to stay in an area, and what could force 
you to move.  Many homeowners run into problems when job transfers or layoffs come and 
they have to move out of the area at a time when real estate is in a slump.  (And 
those two things - big layoffs in an area and real estate slumps - tend to come 
together at the same time!)  Finally, there is the question of what you believe the 
real estate market will do in your area over the time you would expect to own.  (But 
be careful, as people tend to be too optimistic when the market is going up.)

The tax benefits of real estate can be overstated, as they mostly consist of the 
deductibility of interest paid to others.  If by owning you would be merely trading 
the tax benefit of tax deferred contributions to savings for the tax benefit of an 
interest deduction, that does not necessarily sound like a good tradeoff.  Of course, 
those are not the only two issues involved.

Lynn Davis
Fremont, CA

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