The whole Joe Biden raising capital gains tax rates made me think of this impending sale of my rental property and what I will be subject to.

Could any of the SF tax experts weigh in here?

1. It’s a condo: I purchased this to live in in 2007 while single
2. Got married in 2012 and we lived there until 2014
3. Have been renting it out since 2014

I’m not sure here if I owe capital gains tax on the amount I will be making on the sale? Or on the amount I made between purchase price and selling price?

Purchase price in 2007: $90,000

Will be selling for $101,000, had listed it for $80,000 per advice of my realtor as homes have not appreciated in this town much, often times they seem to depreciate. Someone came and offered $101,000, the best of 8 offers, which I accepted.

So I am not sure here?

Do I owe tax on the $11,000? Or on the $21,000?

Or do I not owe taxes on this at all?

What rate is that now?

Help!

Edit: Sorry, it didn't click that it's a rental property. IIRC it's whatever you profit is subject to the cap gains tax. I'm going by what the people I work with that in the rental/real estate game tell me.

Do you use a CPA to do your taxes? You might want to run it by them.

When it was converted to a rental in 2014, whatever the value was then vs what you paid would fall under the exempt up to $550,000 for a married couple. The gains since then, from that point minus the depreciation, is the amount subject to capital gains. Here’s the rub... Even if you didn’t depreciate the property, you’re still subject to the capital gains tax as if you did.

I'm not a tax guy, but...

2007: worth 90K
2014: estimated worth 95.5K
2021: sold for 101K

Capital gain: 5.5K minus 7 yrs depreciation

Now, you could claim it was worth 101K in 2014, but I wouldn't *uck with them.

A lot more questions and facts needed for this than a simple forum answer. With this you need to consult with professional help.

You will need to calculate what is your adjust tax basis in the property. The sales price less selling costs and the tax basis will give you the gain or loss for the sale. Separately, a calculation needs to be made if any depreciation needs to be included in income. As Sigcrazy7 said this does matter if you too the depreciation or not.

Also, depending on the state, they will be looking for their share too.

If you didn't take depreciation, which you should have, you can file amended returns for the last three years to claim it.

Also, the exclusion for capital gains on the sale of your primary residence is lost after 3 years in your case as presented.

Talk with your local tax expert, but I believe all recognized gains on a property you haven't lived in since 2014 are subject to capital gains tax. I believe you have to have lived in the property 2 of the preceeding 5 years to exclude some of the gains - selling here in 2021, if you'd lived there a couple years since 2016 (say 2016-2018) then there's a big exclusion that would have applied. Moving out that long ago, that went away.

And there is more accounting to do to get the number that you'll be taxed on. I've gone through this recently (sold a rental property 2018) but am not an accountant, so I'll probably get the terminology wrong here, but here goes.

The gain is not as simple as the net sales price minus your acquisition cost. First, you've probably been depreciating it on your tax returns. Those depreciation costs you've deducted have reduced your 'tax basis' in the property. The fiction there was that the wear and tear was reducing the value, and the Fed goes along with it...until the end, when you sell it for more than you paid for it, blowing the accounting (it's getting worn out!) fiction away.... And the depreciation taken on your tax return gets recaptured.

Second, you have probably been adding depreciable assets to the property (carpeting, roofing, appliances, etc.) and those will transfer to the new owner. So your accountant has to figure out what the tax basis of those improvements are (the costs you paid, minus any depreciation you've taken on them) and that net undepreciated value (the 'book value' of those assets) reduces your gain, because you're giving them to the buyer as well as the property itself.

Fun fun fun. Not. It's why finding a good tax accountant is a wonderful thing.

quote:

It's why finding a good tax accountant is a wonderful thing.

Amen!!
We got an accountant when we first bought a rental property, he's repaid his fees many times over both financially and in peace of mind. He'll be retiring in a few years, then we'll have to find another.

You pay whatever taxes end up being due on the actual selling price, minus any selling costs (like realtors commission, and other selling costs, etc). In other words, your net from the sale minus cost. The $80,000 you originally asked has nothing to do with this, just the actual selling price.
So unless you have been depreciating the value each year on your taxes making your cost basis lower, your potential gain isn't very much if I'm reading this right ($11,000).

He’s actually required recapture any depreciation he was eligible to deduct even if he didn’t claim the deduction on his returns. Six years of 27.5 year residential rental real estate straight line depreciation is about $19,600. It’s been awhile and I don’t remember if you use a half-year convention or mid-month or no convention, so the $19,600 could be too little.

Selling price 101,000
Less cost 90,000
Capital gain. 11,000
Unrecap. 1250 gain 19,600
Total gain. 30,600

The nice thing is you deduct the depreciation against ordinary income, but it gets recaptured as capital gain. The depreciation is not recaptured. Recaptured depreciation is the amount taken using an accelerated method over straight line and would be taxed as ordinary income. This doesn't apply in this case. The depreciation is unrecaptured Sec. 1250 gain which is a capital gain as reported on form 4979. It gets split out on the schedule D worksheet where, as honestlou points out in his post below, it is taxed up to a maximum of 25%.

You asked about the capital gains tax rate. The good news is that the first $70,000 or so of long term capital gains is taxed at 0% for married filing joint, so if the rental property sale is all you have, you are golden. Unless of course your AGI is above around 250,000 and you are subject to the 3.8% NIIT. This is mostly true in my case and my parents' case, but most likely not in your case. The main part I have wrong is that the unrecaptured 1250 gain will not be taxed at 0%.

Really, the advise to talk to a professional rather than your buddies on the net, is good advice. This part is still 100% correct. Even with a degrees in accounting and finance, having been a CPA with years of tax preparation experience in a public accounting firm, I got it partially wrong. I went 100% auditing after my fourth year as an accountant. I meant for my example above to be taken as proof that your issue is complicated and deserves someone who lives and breaths it on a daily basis.

Edited to fix my mistakes. It's been a long time since I've dealt with Secs 1231, 1245 and 1250. I'll be doing it this year as I'm selling a rental condo as well.

This message has been edited. Last edited by: trapper189,

Remember he will only be depreciating improvements, not land. I have no idea how that works WRT condos and townhomes, but with my houses, I have usually set the depreciation up at 75/25 improvements/land. 80/20 on my more recent purchases.

Net sale proceeds minus net cost (including any improvements, ie new kitchen, floors, roof) equals your taxable gain. Long term capital gains tax runs from 0 to 20%, depending on your income the year you sell it. This includes the gain from the sale. Depreciation recapture is taxed as ordinary income, not capital gains, but is capped at 25%.

Ballpark guess from your numbers, maybe $20k depreciation, so max $5000 on that, then max $800 on the $4000 gain (assuming 6% realtor fee). So a maximum tax burden of $5800, but could be lower depending on your overall income and other expenses relating to the sale or improvements to the property.

quote:

Originally posted by sigcrazy7:
Remember he will only be depreciating improvements, not land. I have no idea how that works WRT condos and townhomes, but with my houses, I have usually set the depreciation up at 75/25 improvements/land. 80/20 on my more recent purchases.

On rental condos, I think the answer is: it depends. In a lot of cases, you could take the position that you don't own the land, the condo association does. The condo association has title to the land, pays the property taxes on the land and you can't sell or do anything else with the land other than use it for what the association says you can use it for.

If you had to split the land cost out, then you'd probably have to split a portion of any reserves the association has set aside out as well because those assets are not depreciable. You'd also have to split any portion of your condo fees that are going to reserves since they are not expenses. You'd have to split out your share of any land improvements the association owns, such as a swimming pool, and take the depreciation on them.

Or not.

Another angle to consider is that if you reinvest your profit into another investment property within the same year you might not have to pay any taxes on it.

I don't know specifics as we were fortunately just under the cap for having to pay capital gains when we sold our rental (I had lived there 2 out of the last 5 years before selling).

I came across this as an option though and at the time it wasn't tightly regulated. You could pretty much reinvest it in any sort of real estate investment.

A tax free exchange is what ubelongoutside is talking about it is called a 1031 and has lots of rules. If you are not familiar with them get a 1031 expert to help you to jump through the hoops.

Biden is talking about ending them. If you intend to go that route, you cannot collect the sale cash, the 1031 escrow agent does.

I would not do either the sale or an exchange without a tax accountant. I have them so I don't need to keep up with the nuances of the tax code. That is what they get paid for. It will save you lots in both the short and long run.

quote:

Originally posted by sig2392:
A tax free exchange is what ubelongoutside is talking about it is called a 1031 and has lots of rules. If you are not familiar with them get a 1031 expert to help you to jump through the hoops.

Biden is talking about ending them. If you intend to go that route, you cannot collect the sale cash, the 1031 escrow agent does.

I would not do either the sale or an exchange without a tax accountant. I have them so I don't need to keep up with the nuances of the tax code. That is what they get paid for. It will save you lots in both the short and long run.

For The Win!
The tax law is complicated, the coming changes make it more so. Dollars spent on professional advice would be an *extremely* wise investment in this case.