Author Topic: Question on long term capital gains.  (Read 2523 times)

Rollin

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Question on long term capital gains.
« on: June 05, 2016, 04:39:17 PM »
Here are the numbers:

original home purchase price - $70,604
depreciation - $50,454
possible sale price used in my discussion - $175,000

I calculate:

$50,454 x 25% = $12,614
$175,000-$70,604 = $104,396 x 13.74% (my affective tax rate) = $14,344
LTCG Tax = $26,958

HOWEVER, I have been reading that if I am in the 10% or 15% tax bracket that I pay 0% on that $104,396. Here is what I'm seeing (and reading in other locations):

The long-term holding period is more than one year. Long-term capital gains are taxed at long-term capital gains rates, which are usually less than ordinary tax rates. The long-term capital gains tax rate is either zero percent, 15%, or 20%, depending on your marginal tax bracket.

0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.


So, do you all agree that my rate would be 0% because I am in the 15% tax bracket (after paying 25% on the depreciation)?

Edit - found this site on IRS - https://www.irs.gov/taxtopics/tc409.html and it says the same thing. So, let me know if any of you see this another way.

Woo hop! - that saves me $$$$

My original post related to Lease Option to Purchase:
http://forum.mrmoneymustache.com/real-estate-and-landlording/lease-option-to-purchase-is-option-part-of-sale-price/msg1040421/#msg1040421
« Last Edit: June 05, 2016, 05:18:06 PM by Rollin »

MDM

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Re: Question on long term capital gains.
« Reply #1 on: June 05, 2016, 06:49:55 PM »
So, do you all agree that my rate would be 0% because I am in the 15% tax bracket (after paying 25% on the depreciation)?
No, because when you add the LTCG to your ordinary income you won't be in the 15% bracket on the total - and the total taxable income has to be within the 15% bracket for you to pay 0% on the LTCG.

You might want to spend $20-$30 and get a copy of TaxAct (or similar) and run the numbers.  Don't know if www.excel1040.com handles depreciation recapture for you or not.

Rollin

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Re: Question on long term capital gains.
« Reply #2 on: June 05, 2016, 06:51:46 PM »
Thanks MDM, I didn't think about that. I'll research it further.

COlady

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Re: Question on long term capital gains.
« Reply #3 on: June 06, 2016, 10:27:56 AM »
I think the answer to your question is no, I don't think you'll pay $0 tax on the sale of your property.

I'm assuming this is a rental property since you've been depreciating it?

The amount of depreciation expense you've taken on a rental property is subject to Section 1254 recapture at ordinary income rates.  Your depreciation expense seems really high. Are you sure that's right? How long have you owned this rental? The remainder of the gain would be subject to LTCG rates.

Also, you're referencing the original purchase price when calculating your projected gain. Your tax basis in the property also includes any capital improvements, such as new cement, remodeling, landscaping, etc. Be sure to add capital improvements to the original purchase price when calculating gain.

Also, something to consider when calculating gain on the sale of a rental is if you have an passive activity loss carryovers (PALs) associated with the rental. This occurs when you have rental expenses in excess of rental income resulting in a net rental loss. There are special rules regarding whether or not you are able to take the net rental loss and net it against your other income (wages, interest income, etc.). If you were required to suspend the losses and hold them until the time of sale, then you need to take those into account too when calculating your projected gain.

I think a simplified way of thinking of it is:

Sales price
less: Cost of sale (realtor)
less: adjusted tax basis (orig. PP + Improvements - total depreciation expense)
less: suspended PALs
Equals Gain or (Loss)





Rollin

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Re: Question on long term capital gains.
« Reply #4 on: June 06, 2016, 01:33:36 PM »
I have had the property for 20 years (as a rental that is, as I lived in it for 10 prior to that) and have put in new AC, roof, structural repair, water heater, etc. and as far as I know that is all included in the calculations.  Thank you for laying it out in an understandable fashion.

COlady

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Re: Question on long term capital gains.
« Reply #5 on: June 06, 2016, 02:02:22 PM »
That makes sense, as the improvements should have been capitalized and would be included on the depreciation schedule you're probably looking at. You're going to have a pretty hefty gain. I hope you're working with a CPA on this?

Rollin

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Re: Question on long term capital gains.
« Reply #6 on: June 06, 2016, 02:13:43 PM »
Yes, as the CPA identified this for me (after I asked). I am now working to sell the property on installment or land contract, as opposed to outright, so that I can spread the "income" out over five years.

Rollin

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Re: Question on long term capital gains.
« Reply #7 on: June 23, 2016, 01:14:07 PM »
I think I got it!

So, each installment payment (and even the down payment) I receive for the sale of the house is made up of:

Interest Income - reported as "ordinary income" (none on the down payment of course)
Return on Adjusted Gross Basis - tax free return (this is $70,604 less depreciation recapture of 50,454 as of the 2015 tax year, or $20,150)
Gain on Sale - reported as "long term capital gain"

Depreciation Recapture - reported year of sale as "ordinary income" (Form 4797)

So this tells me that the "gain on the sale" does not count towards my AGI/ordinary income tax calculations (year-to year shown as "growth profit percentage" for installment payments). In other words, this does not affect my tax bracket (good for Affordable Care Act subsidy too!) and is instead a "long term capital gain" (I've had the house for rent 19 years). This is important because if it was used in calculating AGI/ordinary income, then when I receive the balloon payment five years from now it would cause me to go into the 25% tax bracket (and therefore require me to pay on the LTCG at my (new) marginal rate - ouch!). Because the "gain on sale" does not go towards my AGI (i.e., not ordinary income) it is likely that I'll remain in the 15% tax bracket five years out and then I pay zero on the LTCG (my understanding is that as long as I am in the 10% or 15% tax bracket I pay zero on the LTCG).

That wasn't easy, but thank you all for the input and assistance.

MDM

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Re: Question on long term capital gains.
« Reply #8 on: June 23, 2016, 01:25:27 PM »
So this tells me that the "gain on the sale" does not count towards my AGI/ordinary income tax calculations

Long term capital gains do increase your Adjusted Gross Income.  See line 13 (or maybe 17) on Form 1040.

Long term capital gains are not ordinary income when it comes to the Qualified Dividends and Capital Gain Worsksheet (see p. 44).

Rollin

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Re: Question on long term capital gains.
« Reply #9 on: June 23, 2016, 01:37:55 PM »
So this tells me that the "gain on the sale" does not count towards my AGI/ordinary income tax calculations

Long term capital gains do increase your Adjusted Gross Income.  See line 13 (or maybe 17) on Form 1040.

Long term capital gains are not ordinary income when it comes to the Qualified Dividends and Capital Gain Worsksheet (see p. 44).

i don't know how to fill that out to see how I stand exactly, but at least I have a meeting with my new CPA set for early August. Thank you for that information - and darn, I thought I had it figured out!