Your sale price will be $80000.

Since the gift is over $13000 you will have to file a gift tax return unless your spouse joins in the gift giving. You will not however owe any gift tax.

Regarding gift tax

Normally a person can give up to the annual exclusion amount $13,000 in 2009 ($12000 for 2008) to a person, every year (($26,000 in 2009)$ 24000 in 2008 if spouses joins in for the gift) without facing any gift taxes and note that such amounts do not count as part of your $1,000,000 lifetime total.

Further, IRS allows a person to give up to $1,000,000 in gifts, total, in their lifetime, before they start owing the gift tax. (This gift is not per (donee)person but its a per donor limit). So you can make gifts that are worth up to a million bucks during your lifetime without paying the gift tax. . Even if you do not owe a gift tax because you have not reached the $1,000,000 limit, you are still required to file gift tax return if you made a gift that does not qualify as excludable.

Regarding Gain on Sale of rental property(Sec 1250 property):

Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. The additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method.

In your case, you will not have additional depreciation if you use the straight line method as prescribed by the IRS rules.

Tax on Gain:

To the extent of depreciation allowed/allowable, at least some of those gains (so-called unrecaptured Section 1250 gains) are taxed at a maximum rate of 25%.

The remaining of the gain is taxed at the "general rule" maximum rate of 15%.(Long Term Capital Gain Tax) The remaining of the gain is taxed upto the "general rule" maximum rate of 15%.(Long Term Capital Gain Tax) (5% if the gain would otherwise be taxable in the 10% and 15% brackets)

To the extent an unrecaptured Section 1250 gain falls into the 10% or 15% bracket, it gets taxed at that rate.

So if you bought the property for $100000 and claimed depreciation of $50000, your adjusted basis is $50000 ($100K-$50k). If you sell it for $150K than your gain is $100K ($150K-$50K). Gain upto $50K will be unrecaptured sec 1250 gain and taxed upto maximum of 25% and balance gain of $50K will be taxed as long term capital gain as discussed above.

Expert:	RD
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Answered:	9/23/2009

Certified Public Accountant (CPA)

CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..

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