Have a Tax Question? Ask a Tax Expert
1.When you purchased the house for $169,000 - that was your basis 2.adding $50,000 of improvements resulted your basis to be adjusted to $219,000
3.When you converted your personal home to rental - the basis for depreciation is the lesser of the FMV and your basis - so assuming the value of the property was more than $219,000 - you were need to use $219,000 as your basis for depreciation.4.It is not clear what exactly you meant by "converted it to a rental at a basis of $400,000" - if that was a FMV and you used that value for your depreciation - that is not correct.
5. when you put another $30,000 in improvements - that is added to adjusted basis - but if these were repairs and you deducted these costs as rental expenses - that is not added to your basis. So we need to clarify that item.
6. regarding depreciation...
we need to allocate the basis to the land and to the building. The land is not depreciated.
The building which is used as a residential rental property is depreciated. Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986.
MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.
Residential rental property - buildings or structures and structural components - under GDS is depreciated over 27.5 years.
You must use the straight line method and a mid-month convention for residential rental property.So if you used double declining depreciation for the building - that might be not correct.
If you sell the property now for $333,000 - we may estimate your possible taxable gain.So I assume that your basis is $169,000 + $50,000 + $30,000 = $249,000accumulated depreciation (that you assumable deducted during years the property was rented) $249,000 / 27.5 years recovery period * 8 years the property was rented = $72,500Thus your adjusted basis woudl be $249,000 - $72,500 = $176,500
Your estimated gain $333,000 (selling price) - $176,500 (adjusted basis) - $20,000 (selling expenses - Realtor fees, etc) = ~$137,000
As that will be long term capital gain - it will be taxed at reduced tax rates - most likely 15% - so your estimated federal tax liability could be
$137,000 *15% = ~$20,500
California state income would be extra.Please be aware that is a rough estimate just to illustrate how tax liability is calculated. Your actual tax liability might depends on your other taxable income, filing status, deductions, etc.
You might be able to defer (not avoid!) your tax liability in you structure the sale transaction as a section 1031 exchange - when proceeds are used to purchase another similar property.
Another option is you sell on installments - that will generally allow larger selling price, additional interest income and you will be able to spread income tax liability over several years.
Let me know if you are looking for any details.