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I am preparing my tax return and realize I might be in for a…

I am preparing my...

I am preparing my tax return and realize I might be in for a big shock and want to understand my situation better before I forward all my details to my regular tax filing company. Can I get (pay for) a one time consultation. It relates to tax liability on a house purchased in the 1980s for about US80000 and is now being sold for 280000. I's single and earn over 200k so I'm paying regular tax at a high rate. The house has been rented and the rental income has been reported on in my prior tax returns

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

I'm 69 and am a green card holder. The house has never been my primary residence (although it was originally purchased with that intent)

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Answered in 14 minutes by:
3/27/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,118
Experience: Taxes, Immigration, Labor Relations
Verified

As that was a residential rental - it is depreciated over 27.5 years

So based on your information - the building is fully depreciated.

Thus - your remaining basis is a part apportioned to the land which is not depreciable asset

and most likely - your adjusted basis is ~$20k or so plus sale expenses - assuming another $15k.

Therefore - your realized gain is expected to be

$280k (selling price) MINUS $35k(adjusted basis) = $245k

That gain will be taxed as long term capital gain - at reduced rate - in your income level - that will be 15% or $36.75k

Plus state taxes depending where you live...

Plus NIIT - net investment income tax 3.9%

Let me know if you need any clarification this matter.

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Customer reply replied 3 months ago
Lev
Thanks for the quick and complete response. I'm not sure I understand your use of "depreciated" in this context. I would assume if it's "fully depreciated" means it's residual value is zero. So obviously I've got the wrong concept! Ah! It means that the original purchase price has been depreciated from 80000 to zero. Is that right? I understand that arithmetic, but not the logic. I was hoping there was some consideration of the value of money over time (i.e. inflation) but clearly not.
So, at the end of the day, the rate I'm likely to be hit with is 15% on whatever that net lump sum is? Is that pretty certain?
Thanks again
Stanley
Customer reply replied 3 months ago
Lev,
Are you able to respond to these (final) follow-up comments/questions?
Thanks
Stanley

The issue that your rental property contains tow separate assets - the and and the building.

So your basis - original purchase price - should be apportioned between these two assets.

I just assumed - and you will correct that if needed - that land's basis is $20k and the basis of the building is $60k.

The building is fully depreciated and it's adjusted basis is zero - so here we have correct understanding.

However - the land is NOT depreciable asset - and its basis remains the same.

.

There is NO additional deduction or adjustment for inflation.

Sorry.

.

Your tax liability will be calculated based on your TOTAL taxable income, filing status, deductions , etc.

That gain will be added to your other taxable income.

I just estimate your expected additional tax liability.

The gain is taxable - and because the property was held more than a year - it is taxed at reduced long term capital gain rates.

In your income level- that is 15%.

There will be additional NIIT tax 3.9% and state income taxes

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Customer reply replied 3 months ago
Lev,
Got it many thanks for your help. Much appreciated.
Best
Stanley

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.

If you still have any doubts, need clarification - please be sure to ask.

I am here to help you with all Social Security / Tax related issues.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,118
Experience: Taxes, Immigration, Labor Relations
Verified
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