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Old 06-19-2011, 10:47 PM
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Home was rental for 5 months, now sold: Taxes?

Hi all,

We had a rental that was in use as such until the 13th of May. We then put it on the market the following week and it just closed Friday.

I do our taxes every year but am wondering how I will need to handle this for this year. What forms will I need to fill out? Is the cap gains on the sale taxed at different rates based on AGI?

Bet I could go to irs.gov and figure it out but you guys are way more fun!

Thanks in advance!



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Old 06-20-2011, 08:45 AM
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“I do our taxes every year but am wondering how I will need to handle this for this year. What forms will I need to fill out?”---> When selling rental property not considered a business property, you must file Schedule D of Form 1040 at tax time. Unless the rental property was inherited or acquired as a gift, basis generally equals purchase price plus costs of improvements or minus depreciation. The IRS provides a specific worksheet to determine the amount of gain and thus ordinary income.
“ Is the cap gains on the sale taxed at different rates based on AGI?”--->Yes; a gain on the sale of your rental is taxed at the long-term capital gains tax rate (which is currently 15%), if you’ve held the rental for more than a year. For example, assume that your LTCG is $50,000 ,your personal marginal tax rate is higher than 15%, then no CG tax on $50,000. As long as the rate is higher than 155 then you need pay CG tax, $7,500, $50,000*15%=$7,500.However, your capital gain( I mean STCG) income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%, depending on your tax bracket. Your rental property was depreciated for tax purposes. Depreciation is a way to get a tax deduction by spreading the cost of an asset over a period of time. As a result, depreciation reduces the rental property’s adjusted cost basis.Then you should recapture your depreciation on the rental property. Depreciation recapture may cause a significant tax impact for people who are selling residential rental properties. Part of the gain will be taxed as a capital gain and may qualify for the maximum 15% rate on long-term gains. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate. The technical term for gain related to depreciation on residential property is called unrecaptured section 1250 gain. When your rental property is sold, any passive activity losses( if you have) that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax. For example, assume that as said above , OC of the rental property was $100,000 and accumulated depreciation was $40,000, then the book value of the rental property is $60,000;$100,000-$40,000 and you sell it for $90,000( assume that you own it for more than on eyear), then your LTCG is $50,000;$90,000-$40,000(A/D). then you should recapture $40,000 of the LTCG under sec 1250 gain and is subject to ordinary income tax rate, 25%. Only $10,000 is subject to LTCG tax rate.If your tax bracket is higher than 15%, then you LTCG tax on $10,000, LTCG, is $1,500; your total tax liability is $11,500; $10,000 under sec 1250 gain +$1,500.
Please visit the Website (the CG tax rates table) here; Capital gains tax in the United States - Wikipedia, the free encyclopedia



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