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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22831
Experience:  Taxes, Immigration, Labor Relations
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my relatives have sold a land and they have had a significant

Customer Question

my relatives have sold a land and they have had a significant capital gain. now the capital gain is the only income for that year. dont they get an exemption of 69,000 if filed jointly before commputing capital gain tax and recapture tx since they have done a 1031 exchange. On selling the property they have a 385 K capgain at a rate of 15% and a recapture gain of 50 K at a rate of 25%
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!
You are correct - if there is no other income - a married couple filing jointly will have personal exemptions and standard (or itemized) deduction excluded from taxable income.
You are also correct - that part of the long term capital gain which otherwise would be taxed at 15% or below will be subject of ZERO percent tax rate in 2012. The rest will be taxed at reduced rate - not more than 15%.
The depreciation recapture will be taxed at the regular tax rate - but not more than than 25% (so it might be less than 25%)

LEV :

Assuming the couple has $385k in long term capital gain and $50k taxable income from depreciation recapture - and no other income, assuming standard deduction - their estimated federal income tax liability is $65,500. That amount includes Alternative minimum tax (AMT) - about $8,800

Please be aware that is a very raw estimate. To be precised - the tax return should be prepared.
Let me know if you need any help.
Be sure to ask for clarification if needed.

Customer :

Thank you very much for your timely response. In this senario though what are personal excemptions they can deduct to lessen the tax burden . For one they have hired a property manager . Also can they deduct their living expenses as well as this is their only source of income

Customer :

your calculation of 65,500 does that take into account the exemption of 69000 that I was referring to when they file taxes jointly

LEV :

Here are some details of estimations...

Adjusted Gross income (AGI) $435000

Greater of itemized or std. deduction$11600 - if they itemize that deduction may be larger. Itemized deduction includes - state income taxes, real estate and personal property taxes, mortgage interest, charitable donation, and some other items. Personal living expenses may not be deducted.

Personal exemptions $7400

Total taxable income -$416000 including $385,000 in long term capital gain.
See tax rate schedule on the last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf
Part of long term capital gain which will be taxed at zero rate is determined as $69,000 - ($416000 - $385,000) = $38,000. The rest of the capital gain will be taxed at 15% rate.
So - because there is an additional taxable income - not full $69,000 will be used.

Customer :

sorry did not completely understand your calculations. I see how you got to 416K minus the deductions . do you subtract 69 K from the 385 K getting 315K x 15 % and 50 K times 25 % for the depreciation amount

LEV :

Please be aware that is a raw estimate - not actual tax liability.
According to the tax rate schedule - out of $416000 taxable income:
- first $8,500 are taxed at 10%
- next $22,500 are taxed at 15%
- then - there will be $38,000 attributable to the long term capital gain - taxed at zero percent.
$8500 + $22,500 +$38,000 = $69,000
- the rest of the long term capital gain will be in 25% tax bracket or higher - so it will be taxed at 15% rate.
Let me know if you need any help.

Customer :

thank you for clarification, what is the penalty in dollar amount IRS will charge every year for three years if they dont pay the FED 65,000

LEV :

The maximum late payment penalty is 25% of the tax amount owned.
There will be additional interest charges - for past three years the rate vary - 3-5% and compounded daily.

Expert:  Lev replied 2 years ago.
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