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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience:  Taxes, Immigration, Labor Relations
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Hi. I have a question about capital gains tax. We purchased ...

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Hi. I have a question about capital gains tax. We purchased an investment property in April 2007 for $51,000.00. Financed amount was $45,900.00. Cash down was $7,634.00. Improvements to the property were $6,000.00. Taxable income is around $71,000.00. What dollar amount or percentage can we expect to be taxed should we sell the property (to the renter) by the end of 2008 (without reinvesting)? Thanks.
Submitted: 6 years ago.
Category: Tax
Expert:  Lev replied 6 years ago.

If you sold the property for $71,000 - and the basis is $51,000(purchase price) + $6,000(improvements) +?(depreciation for 2007)= $56,000.

Your capital gain is $71,000 - $56,000 = $15,000 - that will be long term capital gain - the tax rate will not be more than 15% and would depend on your other taxable income, filing status and deductions. Please provide for more précised estimation.

It is also depends if the buyer pay in full or you are providing financing.

Customer: replied 6 years ago.
Our intent is to sell the property for $61,000.00 to the renter (which is the cost of the house and what we put into it). Our adjusted gross income for 2008 is estimated to be $71,000.00. We will not be providing any financing.
Expert:  Lev replied 6 years ago.

Thank you for clarification - so your long term capital gain is expected to be $5000

Based on information above - your basis is $56,000 plus some purchase cost plus some selling cost minus depreciation for 2007 - you provides the cost of the property is $61,000 - where other $5000 comes from?

If you are filing married jointly - your taxable income will be $71,000 - $10900(standard deduction) - $7000(personal exemptions for two persons) = $53,100 - so you are in the 15% tax bracket (up to $65,100) - and long term capital gain will not be taxable for you.

However any depreciation for the time the property was in service should be recaptured and will be taxes at your regular tax rate - 15%

Customer: replied 6 years ago.
I don't understand. In your first sentence you say our long term capital gains tax will be $5000 but then you say ... and long term capital gain will not be taxable for you.

In the long run, here's what we are trying to do.
Sell the house to our daughter (who's been renting it for the past year). We don't want to make any money on it but sell it to her for what we owe the bank (which is $60,000 and that includes our cash down payment, improvements, etc).

Based on our tax bracket (which I assume is around 15%)... will we or won't we have to pay long term capital gains tax when we file our 2008 tax return should she buy the house from us in 2008.
Expert:  Lev replied 6 years ago.

That is correct - long term capital gains will be $5000 - not long term capital gains tax

as long as you are in 15% tax bracket - your long term capital gain is not taxable. Long term - means you held the property more than before selling.

If you sell the property for less than a fair market value to the related party - your daughter - that would be a gift. If the fair market value of the property is $80,000 and you are selling it for $61,000 - that means you are selling $61,000/$80,000*100% = 76% of the property and gifting 24%.

Your capital gain should be calculated based on that part that you are selling.

For the gifted part - if the value is above $12,000 - you are required to file a gift tax return (there likely will not be any gift tax).

Customer: replied 6 years ago.
Thanks... but why won't there be a gift tax?
Expert:  Lev replied 6 years ago.

I did not say - there will be a gift tax - I said you might be required to file a gift tax return.

There will not be any gift tax unless your lifetime limit of $1,000,000 is reached.

But if the value of the gift is above $12,000 - you are required to file a gift tax return.

Customer: replied 6 years ago.
Thanks... and I know I'm driving you crazy... but my last question is (and to clarify)... My spouse and I (even though my spouse is not the biological father of my daughter) can sell the property for around $61,000 (which appraises at $80,000) and our long term capital gain is not taxable. We will, however, have to file a joint gift tax return because the value of the gift is around $19,000 but it will not be taxed because it's under the $24,000 rule. In essence, no one will be penalized or taxed come 2009?
Expert:  Lev replied 6 years ago.

Assuming you sell the property for $61,000 - considering the FMV of $80,000 - that means you are selling $61,000/$80,000*100% = 76% of the property and gifting 24% - or $19,000.

Your basis attributable to part you are selling will be $56,000 (please verify if you need to add any other expenses)*76% = $42,560

Your capital gain on the part you are selling will be $61,000 - $42,560 = $18,440.

If you are filing married jointly - your taxable income will be $71,000 - $10900(standard deduction - assuming you are not itemize - please verify) - $7000(personal exemptions for two persons) = $53,100 - so you are in the 15% tax bracket (up to $65,100).

If you add long term capital gain - your total taxable gain will be $53,100 + $18,440 = $71540 - that will push you into 25% tax bracket - and your long term capital gain will be taxable:

  • $65,100 - $53,100 = $12,000 will be taxed at 5% - $600
  • $18,440 - $12,000 = $6,440 will be taxed at 15% - $966
  • total long term capital gain taxes $1566

As ther e will be a gift of $19,000 - you are required to file a gift tax return. There will not be any gift tax. You will use form 709 - http://www.irs.gov/pub/irs-pdf/f709.pdf

I glad that you are asking before you are selling - you may be better prepared. Please let me know if any clarification needed.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience: Taxes, Immigration, Labor Relations
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