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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10163
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am selling a rental property I invested in over 30 years

Customer Question

I am selling a rental property I invested in over 30 years ago with my dad. When he passed 28 years ago the title was passed on to me and my children, then age 6 and 8 , now 34 and 36. I have always claimed the property100% just on my tax return. Now that I am selling, for tax purposes , do I have options of how the gains be passed at closing? Is it to my bennifit tax rate wise, to split proceeds three ways? Can I do this since they never showed rental property? I realize they would have to pay taxes but I assume at a lower rate? Their income is around 65k both single . Mine, married is 230k. I am looking at a 94k gain and the basic of the condo cost at $9,500. I was asked if I wanted one check with all three names or three separate checks. Hope you understand what I am asking! Bot***** *****ne trying to save on taxes if it is possible and legal, thanks
Submitted: 4 months ago.
Category: Tax
Expert:  Lane replied 4 months ago.

Hi. My name's Lane. I can help here.

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The sale will be based on the names on the title (that's why they asked about one check with thre names on three checks).

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Likely three checks will make things cleaner (easier to see that you each have a sale price of X/3)

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Each of your basis will start with the fair market value (FMV) as of the date of death (this is the step up uin basis at death that you may have heard about).

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Capital gain = sales price minus basis

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Basis equals purchase price (or in this case FMV at death of the decedent) plus improvements Minus depreciation.

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What really SHOULD have happened is you each should have taken proprotionate amunts of rental income and expense on your respective schedule E's.

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That way the depreciation recapture (that part of the gain that's attributable to the depreciation over the years) would be fairly distributed (based on ownership).

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But since it wasn't, what will happen here is they (although likely taxed at a lower rate - I'll get to that below) will pay a portion of their capital gain at the depreciation recapture rate, when only you go the benefit ofnthe depreciation write ofs over the years - and it wounds like you paid any income tax on net rental income as well... so maybe this all comes out in the wash.

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Long-term gains anre taxed at.

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  • 0% if taxable income falls in the 10% or 15% marginal tax brackets
  • 15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
  • 20% if taxable income falls in the 39.6% marginal tax bracket
  • 25% on Depreciation Recapture

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And that gain (each of your portion of it) will likely be at different rates because those taxable income brackets are based on (1) filing status and (2) income level - th capital gain is a part OF that taxable income by the way.

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But the bot***** *****ne is that if any one of you were audited for the year of sale, IRS would look to the deed to see what the gain should be ... and they'll assign that recapture (as a part of each of your basis) as well as the sales price acording to ownership.

Expert:  Lane replied 4 months ago.

Now, in my 30 years in practice, Ive seen this many times, and in my experience this doesn't open up a can of works as it relates to the previous filings.

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Someone paid the tax (and likely at a rate that was higher than itwould have been if distributed across three returns with your sons making less income)

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But NOW, the taxable event is the sale, and they'll look to that being reported based on ownership.

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One thing to remember aout depreciation is that they always recapture it (even if you didn't take it). That's why IRS calls this kind of property "depreciable property," rather then "depreciated" property.

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Please let me know what questions you have from here.

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Lane

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I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Expert:  Lane replied 3 months ago.

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know if you need more here.

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Lane

Expert:  Lane replied 3 months ago.

Hi,

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I’m just checking back in again.

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Haven't heard from you since the answer.

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Did you have other questoins?

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

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Lane

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