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I need to know how to calculate capital gains tax on a

rental property I am selling...
I need to know how to calculate capital gains tax on a rental property I am selling so I know how much i will have to pay on my 2017 tax return. Can you help?
JA: The Expert will know how to help. Please tell me more, so we can help you best.
Customer: I need to know how to calculate capital gains tax on a rental property I am selling so I know how much i will have to pay on my 2017 tax return. Can you help
JA: Is there anything else the Expert should be aware of?
Customer: I don't think so
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Answered in 7 minutes by:
10/13/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,880
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

HI, MY NAME’S LANE - I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986. I can help you here.

...

First, CAPITAL GAIN = SALES PRICE - BASIS

...

And basis is your investment in the property (purchase price + improvements - depreciation)

...

Then long term capital gains are taxed at a rate that is based ON your total taxable income and the ordinary income tax brackets.

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Here are the the regular brackets for someone filing as a single taxpayer:

...

Single Filing Status

Single 2017 Tax Brackets

...

Taxable Income ........ Tax Bracket:

$0 - $9,325 .................. 10%

$9,326 - $37,950 .......... 15%

$37,951 - $91,900 ........ 25%

$91,901 - $191,650 ...... 28%

$191,651 - $416,700 .... 33%

$416,701 - $418,400 .... 35%

$418,401+ ................... 39.6%

...

But then if you've held the property for more than a year, you'll get the lower long term capital gains rates (except that the depreciation recapture of part of the gain is always at 25%)

...

Long-term gains and qualified dividends taxed at

  • 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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Customer reply replied 1 month ago
How do I figure the depreciation of the property. I have not claimed the depreciation on my taxes. We have been renting it for 10 years. The rent we received did not cover the mortgage payment and we payed 198.00 every month to cover the mortgage. We purchased the home for 183,000 and we invested 11,000. We are selling it for 268,000. Can you give me a ballpark figure of the capital gains tax?

Sure give me a minute ... (Please don;t shoot the messenger but they'll expect recapture regardless of whether you actually took the depreciation. That's why they call it depreciable property (rather than depreciated property). In the tax code it says "allowed or allowable..."

...

Bt give me just a sec and I'll run the numbers

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Customer reply replied 1 month ago
Ok, my wife just corrected me. We have been renting for 8.5 years

Great ... just a sec

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OK so the sales price is 268000 and your basis is (183,000 + 11,000 - (183000 / 27.5 x 8.5)

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residential property depreciation is 27.5 years.

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So we have 268000 - (183000 + 11000 - 56563) = 130,563 total gain.

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56563 of that is depreciation recapture, so 56563 x .25 = 14140.75

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That leaves 130563 - 56563 = 74000 of gain to be taxed at the lower LTCG rates

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74000 x .15 = 11100

...

14140.75 + 11100 = 25240.75

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You really might want to hire a good CPA or EA close to you to do a form 3115 (along with the taxes for the year of sale). 3115 allows you to correct the fact that you didn't take the depreciation, and take it all in the year of the sale.

...

Even if it was just a mistake, you would treat it as an accounting method change and file a Form 3115 in the current year and take the prior depreciation as a section 481(a) adjustment. [land value is separated ,land is not depreciated].

...

The 3115 is VERY complicated but in this case it's likely worth the cost to get the benefit of that depreciation.

Ask Your Own Tax Question
Customer reply replied 1 month ago
Ok thanks. I'm still trying to catch my breath! Thanks for your help. It looks like I will be hiring a tax CPA this year. :-)

Glad to help. Yes, that what SO many do in this situation.

...

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

Lane

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,880
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
Ask your own question now

Thanks so much

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Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,880
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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