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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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Hello. I recently sold 2 long terms real estate investment

Customer Question

Hello. I recently sold 2 long terms real estate investment properties. One was purchased at $123,000 and we spent about $20,000 to fix it up. We sold it for $190,000 (after deducting closing costs) for a profit of $47,000.

The second property was purchased fror $175,000 and we paid $56,000 in repairs before selling it for $306,000 (after closing costs), for a profit $75,000. We made a total profit of $122,000 for the 2 properties sold. We oned these properties for 9 years.

Our state income tax in NJ is 8%, so added to the federal rate of 15%, we are expecting to pay 23% in taxes on the gain. Would our capital gains taxes be a straight 23% of the total profit amount ($122,000 X .23 = $28,060) for , or will the depreciation that we had taken over the years of ownership be added into the equation somehow? I heard somewhere that past depreciation would be added back in to increase the size of the gain. Is that true? If not, did I accurately calculate our tax amount? Thanks!
Submitted: 4 years ago.
Category: Tax
Expert:  MequonCPA replied 4 years ago.

Dear ybqo7e51 -

 

To determine your gain you must also reduce your cost by the allowed or allowable depreciation. Thus you must reduce your basis by the amount of the depreciation you took OR should have taken.

 

To the extent that your gain represents prior depreciation taken, the capital gains tax rate is 25% (federal) any gain in excess of that amount is taxed at 15%. The state rate does not change.

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