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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 20645
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Question for Lane, when figuring the capital gains tax on

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Question for Lane, when figuring the capital gains tax on the sale of a building. you take the sale price-closing costs-remaining basis for the taxable gain amount. The depreciation taken prior to the sale is taxed at 25%.
Lets say the total prior depreciation was 100,000, with a tax due of 25,000. does this 100,000 get to be a reduction now against the taxable gain amount? reducing it further before its taxed a fed,state and city capital gains rates?
Is the depreciation tax a totally separate entity or is it accounted for and comes off the whole taxable sale price end?

No, the depreciation just lowers basis.

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Sales price - basis = capital gain

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Basis, for rental is, purchase price (or FMV at date of death if inherited) + improvements - depreciation

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Then, when calculating the capital gains tax, there are two components of gain.

  • The portion that's there becasue of the depreciation lowering basis all along the way.
  • And the rest of the gain.

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The depreciation recapture (always calculated and taxed, recaptured, first) is at 25%

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Then the rest of the gain is at the lower long-term capital gains rates; 15, 13.8, and 23.8, progressively.

Customer: replied 1 month ago.
here is a paragraph of an article which I found. It states the depreciation gets deducted from the basis then again from the taxable value. perhaps the author confused himself?"
"Assume a property owner acquired a building for $2 million (excluding land). Assume after 10 years the owner has taken $500,000 of depreciation deductions. The owner’s basis in the building is now $1.5 million. If the owner sells the building for $5 million, they will recognize a gain of $3.5 million ($5 million less $1.5 million). It is often presumed the $3.5 million would be taxed at a capital gain rate of 20%. However, in this example, $500,000 of the gain would be taxed at the recapture rate of 25%. The remaining $3 million gain would be taxed at the 20% capital gain rate. The outcome in this example is an additional $25,000 tax cost (5% on $500,000). Larger transactions would obviously have larger implications.
Customer: replied 1 month ago.
it says the remaining 3 million taxed at 20%. it should have said 3.5 million at 2o% and the taken 500,000 at 25%?

That's right.

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He has the concept right, but selling at 5 means that there's 3.5 at the regular long term rates ... AND he's completely forgotten to bring in the NIIT.

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NIIT kicks in at taxable income (capital gain is both considered investment income for purposes of the NIIT tax and is a part of taxable income) at $200,000 if you're single or file as head of household.

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So that 3.8 starts being added to the 15% at 200,000 of taxable income and then is still there at the 20% rate, so it's really 23.8%

Customer: replied 1 month ago.
i thought the depreciation taken was taxed separately and was deducted from the total. the article said they took 500k in depreciation they purchased for 2m. the basis left was 1.5m. they sold for 5m which meant to me they paid on 3.5m gain but the article said they paid on 3.0m gain and on 500k depreciation. I was thinking it would have been 3.5m gain and an addition 500k taxed for depreciation.
Customer: replied 1 month ago.
it seems they took the initial 2m purchase basis and deducted it from the sale to figure tax at capital gains rate. the took the depreciation separate taxed at 25%
Customer: replied 1 month ago.
34;Basis, for rental is, purchase price (or FMV at date of death if inherited) + improvements - depreciation" here they took the purchase price off the sales price .
Customer: replied 1 month ago.
handled depreciation separately

"i thought the depreciation taken was taxed separately and was deducted from the total. the article said they took 500k in depreciation they purchased for 2m. the basis left was 1.5m. they sold for 5m which meant to me they paid on 3.5m gain but the article said they paid on 3.0m gain and on 500k depreciation. I was thinking it would have been 3.5m gain and an addition 500k taxed for depreciation.2 Dec 2019, 4:07 PM

it seems they took the initial 2m purchase basis and deducted it from the sale to figure tax at capital gains rate. the took the depreciation separate taxed at 25%"

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Yes, we agree ... they did the math wrong ... it's 3.5 at regular gains rates

I was just pointing out, in addition to that, that they didn't mention the additional 3.8% that will apply to much of the as well

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(... a very careless piece)

Customer: replied 1 month ago.
ok thanks

You're welcome.

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As always, appreciate a positive rating so they'll compensate me for the time.

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