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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 13213
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Bought house from parents in 2004 in Texas. Sales price was

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Bought house from parents in 2004 in Texas. Sales price was 125K, parents gave 25K gift of equity so we can finance for 100K and not pay PMI. Live in home from 2004-2007. In 2007 made it into rental till now. We are thinking of selling it for 115K, and real estate commission is 7% of 115k. We depreciated the home for 21K and appliance etc for 9K. How much do we have to pay in capital gain and recapture depreciation tax. Will we pay taxes on the 25K equity. We are in 15% bracket.Thanks
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thank you for your question, and thanks for using JustAnswer.com.

MyVirtualCPA :

So your basis in the home is $125,000 less the 21,000 of depreciation

MyVirtualCPA :

So, an adjusted basis of $104,000

MyVirtualCPA :

Selling costs are $8,050.

MyVirtualCPA :

That leaves $2,950 in gains. This is attributed to depreciation recapture and you will owe tax on 25% of that

MyVirtualCPA :

That's $738

Customer:

So my total tax liability would be $738 which includes capital gains and depreciation recapture tax.

MyVirtualCPA :

You would owe tax on recapture at 25% of the gain

MyVirtualCPA :

That would be your tax

Customer:

If we had improvements done to the house example 4K, we would be at a capital loss correct? And then we don't pay and

Customer:

any recapture depreciation either, correct.

MyVirtualCPA :

That is correct

MyVirtualCPA :

When there is a loss, there is no depreciation recapture

Customer:

Can we include appliances,ac units etc that we depreciated as improvements

MyVirtualCPA :

The AC Units would be improvements, but your appliances would not be. This would be like a new roof, new hvac systems, a kitchen remodel, things like that

Customer:

Ok so if we spend 4500 on AC unit and depreciated example 2K of it. Do we use the 4K as improvement or the leftover 2500

MyVirtualCPA :

The leftover $2,500

MyVirtualCPA :

So you'd have $450 of gain, which is taxed at the recapture rate

Customer:

House was horrible when we got it, so we had to do siding, new flooring etc. Would that be improvement. Also if we had capital loss, will that amount reduce gross income

MyVirtualCPA :

Yes, the siding flooring etc would all be improvements If you had a capital loss, yes that would reduce gross income

Customer:

great thank you so much. Do we need receipts of improvements or can we use pictures (before and after) as evidence

MyVirtualCPA :

You need receipts or proof of the amount you spent. You could use bank records if you didn't keep invoices. You can certainly keep photos, but that doesn't prove how much you spent

Customer:

So if our tax bracket was 25%, then we would pay capital gain tax correct if we had a gain.

MyVirtualCPA :

The first $21,000 of gain would be taxed at 25%, then the remainder would be taxed at 15% if your tax bracket was 25%

Customer:

Thank you so much for your help. I was so worried that we had to pay 25% recapture depre. tax on the 21K.

MyVirtualCPA :

If there is a gain, the first 21K is taxed at 25%

MyVirtualCPA :

You will not pay tax if there is a loss, because there's nothing to recapture

MyVirtualCPA :

Is there anything else I can help you with today? If not, please rate my response "excellent" so that I may receive credit for assisting you today

Customer:

Sure thanks again

MyVirtualCPA :

You're welcome

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 13213
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you

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