Originally Posted by sasha101
#1;Our C-Corp purchased some rental property fifteen years ago, in California. We never took Depreciation. We paid $200k for the property.
#2;We have about $50k in capital improvements. We have negligible amounts of Carry Forward Losses. -- We want to sell it now for about $600k. Costs of sale will be about $50k. Assuming, therefore, a Capital Gain of +/- $300k, what would be the Tax Rate (as a percentage) and what would be the dollar amount of taxes owed?
#1;As you can see, you cannot deduct the full cost of an asset in its first year of use. This deduction must be spread over the expected life of the asset to match its annual wear and tear, known as depreciation;so it does not make sense to skip a depreciation deduction because the IRS imputes depreciation, meaning that even if you don't claim the depreciation against the rental property, the IRS still considers the property's basis reduced by the unclaimed annual depreciation. You have the same adjusted cost basis for selling your rental property whether you claim the depreciation deduction or skip it. Because of imputed depreciation, you may as well claim depreciation, even if you can't use it this year.
#2; Some capital assets are 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 asset's adjusted cost basis. When the asset is subsequently sold, the gain on the sale will be higher since it's basis is now lower. How the gain is treated depends on the type of asset. Depreciation recapture can 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 0% (UNLESS shareholder’s marginal tax rate is higher than 25%)rate on long-term gains or 15% as long as shareholder’s tax bracket is 25% or higher. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate to shareholders as ordinary income. The technical term for gain related to depreciation on residential property is called unrecaptured real estate depreciation.The sale of assets in a C corporation is subject to taxation at C corporation rates, ranging from 15% to 35% federal tax. On the other hand, long term capital gains on the sale of real estate in a partnership, an S corporation, or held outside an entity is taxed to individual owners at 15% for land and gains above original cost and at 25% on depreciation recapture for federal purposesThe amount of recaptured depreciation is taxes at your ordinary tax rate based on your total taxable income. The same is true if it is taxable for corporation.There is no any special treatment for the recaptured depreciation. I mean The sale of assets in a C corporation is subject to taxation at C corporation rates, ranging from 15% to 35% federal tax. On the other hand, long term capital gains on the sale of real estate in a partnership, an S corporation, or held outside an entity is taxed to individual owners at 15% for land and gains above original cost and at 25% on depreciation recapture for federal purposesThe amount of recaptured depreciation is taxes at your ordinary tax rate based on your total taxable income. The same is true if it is taxable for corporation.There is no any special treatment for the recaptured depreciation.
NOTE; Often, real estate is held by legal corporate entities for the liability protection that these corporate structures offer. The drawback of traditional C Corps is that when the real estate is sold, the corporation pays taxes and then the shareholders are taxed a second time at the individual level. Often these tax liabilities can be more than 50% of the gain as you own real estate within a C Corp and are considering selling this highly appreciated asset, you have some options:
1) you may use a 1031 Tax-Deferred Exchange. The proceeds from the sale can be used to purchase another qualified property. This can defer any tax liability but must be done within a limited time frame after the sale. However, if your goal is to use the proceeds from the sale and not buy additional investment property, this is not the strategy for you.
2) you may sell the property and liquidate the C Corp. In this scenario, you must pay both the corporate and individual taxes, and may realize only 40% - 50% of the final sale price. To avoid paying the corporate tax, you could convert your C Corp to a S Corp. This process, however, has a 10-year waiting period along with other legal requirements.please contact a CPA/an IRS EA n your local area more info in detail for your fed and state returns