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Old 09-17-2011, 12:37 PM
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Could you help me calculate approx tax for selling a rental?

I have a home and want to purchase another. I will be moving to this new home and living here, leaving the first and renting it out.

If I choose to sell the rental in 7 years, then I know I am subject to the long term capital gains tax as well as the depreciation recapture tax.

If the home depreciates $7000/yr then it would be $49,000 in depreciation.

If I purchased the home for 300K, of which $200,000 was the home and 100K was the land, then it would be $200,000-$49,000 (lets approx to $50,000 to make it more simple). So the home is now worth $150,000 and thus, it would be like I purchased it for $150,000 + $100,000= $250,000. So if I sell this home for $550,000, then it would be a profit of $300,000.

Of the $300,000, I would subtract the $50,000 and this $50,000 would be taxed at 25%

Then the $250,000 would be taxed at my income tax rate...say 30%.

Is the above calculation correct?

Also, what if I choose to return to my rental property, live for 2 years, and then sell it. Can I use the $500,000 exemption rule then?

Thanks in advance!



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Old 09-17-2011, 07:21 PM
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“If I choose to sell the rental in 7 years, then I know I am subject to the long term capital gains tax as well as the depreciation recapture tax.”---->Correct; you are NOT subject to Sec 1250 depre. recap rule UNLESS you purchased the rental property before 1986. As you can see, since the use of the S/L method is required for r/e acquired after 1986, there’d be no Sec 1250 recap(the amount of unrecaptured section 1250 gain in an installment payment that is properly taken into account after May 6, 1997, from a sale before May 7, 1997, is determined as if, for all payments properly taken into account after the date of sale but before May 7, 1997, unrecaptured section 1250 gain had been taken into account before adjusted net capital gain) on the disposition of your rental property. However, a special 25% tax rate applies to your real property gains, LTCG, I mean, attributable to depreciation previously taken and NOT already recaptured under the Sec 1250 rule. SO, any remaining gain attributable to unrecaptured depre. Previously taken, including S/L depre. Is taxed at 25% rather than the LTCG rate of 15%( if your marginal tax rate is higher than 15%) 0%(if your tax bracket is lower than 25%). When your ordinary tax rate is only 10 or 15%, the depre. Recap. Will be taxed at 10 or 15% to the EXTENT of the remaining amount in the 10 or15% bracket and the 25%.The taxable portion of the rental sale equals what is left from the sale proceeds amount less the original property basis, adjusted for any capital additions (i.e. renovations, added a permanent feature, etc.). If the net value equals a negative number no taxes are due since there is no gain, and the loss’d be ORDINARY LOSS, NOT LTCL. Ordinary loss that is larger than your gross income for the year can leave you with zero taxable income(luckily, OL are not subject to the $3,000 annual limit that is imposed on capital losses. O.L. are netted against ordinary income, which is taxed at your highest marginal tax rate. O.L. can therefore offer you greater tax savings than long-term capital losses.). If you have a long term capital gain,LTCG, then in additional to the federal capital gains tax rates, your capital gains will also be subject to your state income taxes.
“If the home depreciates $7000/yr then it would be $49,000 in depreciation.”-->Correct; I guess under the S/L depre. method.
“If I purchased the home for 300K, of which $200,000 was the home and 100K was the land, then it would be $200,000-$49,000 (lets approx to $50,000 to make it more simple). So the home is now worth $150,000 and thus, it would be like I purchased it for $150,000 + $100,000= $250,000. So if I sell this home for $550,000, then it would be a profit of $300,000.”--->Correct; $250,000 is your (adjusted)basis, I mean your book value(original cost minus acc. Depre.) So, you LTCG is $250,000; $550,000(SP)-$250,000(Book value).As long as you have claimed depreciation on the rental property in the past, and sell the building and chattels for more than the depreciated value this depreciation recovery is taxable income. However, if you sell the property at less than the depreciated value there will be no depreciation recovery. You cannot claim a loss on sale.
“Of the $300,000, I would subtract the $50,000 and this $50,000 would be taxed at 25%.”---> Correct as long as your marginal tax rate is higher than 15%; as said above,your rental property is NOT subject to Sec 1250 depre. Recap rule. So, any remaining gain attributablr to unrecaptured depre. Previously taken, $50,00, in this particular case, , including S/L depre, is taxed at 25% rather than the LTCG rate of 15% or 0%( if yur tax bracket is lower than 25%).
“Then the $250,000 would be taxed at my income tax rate...say 30%. Is the above calculation correct?”--> No; your tax liability on the LTCG is $12,500; $50,000*25%, NOT 35%, your tax bracket. The remaining $200,000 of the gain will be taxed at a rate of 15%.So total TL is $42,500;$12,500+$30,000.
“Also, what if I choose to return to my rental property, live for 2 years, and then sell it. Can I use the $500,000 exemption rule then?”---> Correct. As you can see, the unrecaptured depre recap rule is required when you dispose of the rental property. As long as you sold your MAIN home and made a profit, you may be able to exclude that profit from your taxable income.can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years.


Last edited by Wnhough : 09-17-2011 at 07:27 PM.


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