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RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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Capital Gains tax in VT

Resolved Question:

If we are in a very low tax bracket what percentage will we pay on a 300.000 capital gain from the sale of a business. (Bed and Breakfast). Will we have to pay Capital Gains if we sell our home which is on the business property yet is a separate building from the Inn.
Submitted: 11 years ago.
Category: Tax
Expert:  RD replied 11 years ago.
Regarding sale of business:
Depreciation recapture is required when you dispose of what is termed Sec. 1245 and Sec. 1250 property. Section 1250 property consists mostly of real property (i.e. land and building structure including integral components of the building such as roof, windows, etc. that are replaced). Section 1245 property is most other tangible property included in the sale of the real property (i.e. equipment such as washers & dryers, refrigerators, etc.) if any.
For both Sec. 1245 & Sec. 1250 property depreciation recapture is limited to the lesser of your gain or depreciation allowed or allowable. All depreciation (including Sec. 179 expensing) taken on Sec. 1245 property must be recaptured as ordinary income.
With respect to Sec. 1250 property you only need to recapture the depreciation taken that is in excess of straight-line depreciation calculated using the same useful life.
For example, assume you have a property costing $250,000 with $150,000 allocated to the building which was depreciated by $100,000 up to its date of sale for $400,000. Accordingly, the prelimiary gain is $250,000 (i.e. $400,000 less $150,000 basis ($250k-$100K depr.)). If under the sraight-line method (i.e. allocated cost divided by the estimated months of useful life times months depreciated) the taxpayer would have only depreciated $70,000, then $30,000 of the of the $250,000 gain realized must be recaptured as ordinary income.

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

The remaining of the gain is Long-term capital gain and is subject to a maximum tax rate of 15% (5% if the gains would otherwise be taxed in the 10% and 15% tax brackets).

Regarding sale of home:
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes if you meet the ownership and use tests. You will generally only need to report the sale of your home if your gain exceeds a certain dollar prescribed by law. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you must have:

Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases (change in place of employment, health or unforseen circumstances)

State tax may apply too on the gain.

Let me know if you have any question.
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Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.
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