Taxes and real estate

[Credaholic]

Tax time! Yay...

Wondering if anyone can clarify a couple things for me. This year we moved into a new house while our house was on the market. Can I deduct the mortgage interest on both properties, or do I have to subtract out the two months of our previous personal residence for when we weren't living there any longer?

I also have a question looking ahead at next year. We have a rental property which we've depreciated on our taxes for four years. We're considering selling it this spring, but I don't quite understand how the depreciation works. Is it basically that the deprecitation is subtracted from the basis to determine any taxed profit?

[Cheddar Stacker]

You can deduct mortgage interest from multiple residences. Total allowable debt is $1M, so if the loans are $600K each you would have to exclude $200K of debt (16%) in your calculation of deductible interest.

Here's a link to another post of mine that could be helpful:
http://forum.mrmoneymustache.com/real-estate-and-landlording/questionsadvice-about-rentals-gt-1031-exchange-gt-rental-gt-primary-residence/msg511564/#msg511564

Long story short, if you don't do a like kind exchange on the rental, any depreciation you've taken will be taxed at 25% federal plus state rate. Sale price, less purchase price, plus depreciation, less capitalized improvements (new roof, furnace, etc.), less costs of sale (commissions, etc.) = long-term Capital Gains taxed at 0%/15%/20% plus state rate depending on your tax bracket.

[abo.abo]

Sale price, less purchase price, plus depreciation, less capitalized improvements (new roof, furnace, etc.), less costs of sale (commissions, etc.) = long-term Capital Gains taxed at 0%/15%/20% plus state rate depending on your tax bracket.

Wait, you don't really mean "plus depreciation"...right? Does that mean you make a depreciation repayment PLUS you pay capital gains on the depreciation you claimed previously?

I've been attempting to google this for my own taxes, but the internet is a confusing place full of misinformation. But I think the way it works, if you sell at a profit, is that there are two separate tax costs:
- Depreciation repayment of 25% (+ state) of all the depreciation you have ever claimed
- Capital gains tax on [sale price minus purchase price minus buying and selling costs minus improvement costs]

So the depreciation amount does not impact the capital gains tax at all, except insofar as it affects what tax bracket you are in.

Can someone tell me if this is right??

[Cheddar Stacker]

Sorry, that was a really shitty way to describe it. Even I can't understand what I meant. My mind works better with real numbers, so let's just do this:

Buy - 100,000
New roof - 10,000
Depreciation for a few years - 20,000
Sell - 160,000
Commission & other costs - 9,000

Depreciation recapture = 20,000 * 25% + state
Capital gain = 41,000 * 15% (likely) + state

160 - 100 - 10 - 9 = 41.

So you don't add back depreciation for the cap gain, but it gets added back in as part of the total gain, which would then be 61,000.

So yes, you are correct. Sorry for any confusion. And good catch.