Author Topic: Rental Sale Profit Affect on Tax Bracket (Rate) Question  (Read 1643 times)

Rollin

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Rental Sale Profit Affect on Tax Bracket (Rate) Question
« on: July 15, 2016, 12:35:24 PM »
I have had a few other posts started here that have helped me along on my journey, and ultimate goal of retireing AUGUST 4th (early)! I have one lingering question (for now), and what I mean by lingering is I just cannot get comfortable with a final answer based on my research. So, here is the question:

Does the profit on the sale of my rental property affect the tax bracket that I am in (assuming the profit is enough to nudge me into the higher bracket if it does count)?

I'm already clear on the recapture and other long term capital gains (LTCGs) work and calculations, but this particular point I am not. The reason I am asking is that I will pay zero in LTCGs as long as I remain in the 15% or lower tax brackets. So if the profit causes me to reach a higher tax bracket than I lose that benefit. If it does not and my bracket stays the same regardless of the profit, then great.

dandarc

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #1 on: July 15, 2016, 12:45:47 PM »
yes.  LTCG, I believe, are considered your 'last dollars' for this purpose.

The worksheet in the instructions for form 1040 might clear it up - you're looking for "Qualified Dividends and Capital Gain Tax WorksheetóLine 44"

seattlecyclone

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #2 on: July 15, 2016, 12:55:14 PM »
For long-term gains it's not like you either get 0% or you don't. The 0% rate applies on all long-term gain income up to the point that it puts your total income at the top of the 15% bracket, and then you pay 15% on the gains after that.

Rollin

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #3 on: July 15, 2016, 01:29:45 PM »
Thanks to both of you. Very helpful and I think I get it!

So if the cutoff for the 15% bracket is $75,300 and I have a normal income (AGI) of $70,000 and a profit of $10,000 I would pay taxes (15%) on $4,700. The $5,300 is at zero. It doesn't put me into another bracket (the next higher bracket).

Later tonight I'll look at the instructions on the 1040 you referred to danarc as this may shed more light on it as well (it probably not this simple :). That look may help me understand if this affects my Modified Adjusted Gross Income for ACA purposes as well.
« Last Edit: July 15, 2016, 01:47:16 PM by Rollin »

dandarc

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #4 on: July 15, 2016, 02:04:28 PM »
Of course the work sheet is a lot of "copy line 43 from 1040.  Subtract line 8 from line 4." types of stuff, but you've got what it accomplishes down - start with "all other taxable income", then look at your LTCG income and figure how much is at 0%, then how much at 15%, then how much at 20%.  Add up and that's your long-term capital gains tax.

Rollin

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #5 on: July 15, 2016, 02:06:52 PM »
Of course the work sheet is a lot of "copy line 43 from 1040.  Subtract line 8 from line 4." types of stuff, but you've got what it accomplishes down - start with "all other taxable income", then look at your LTCG income and figure how much is at 0%, then how much at 15%, then how much at 20%.  Add up and that's your long-term capital gains tax.

Ah - so I'll adjust that 15% tax I indicated on the $4,700 example to 20%.

dandarc

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #6 on: July 18, 2016, 07:57:48 AM »
You were right (assuming this qualifies as a long-term capital gain) - 15% on the $4700.  The 20% bracket for LTCG doesn't kick in until the 39.6% regular tax bracket - over $400K in taxable income regardless of filing status to get there.

Rollin

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Re: Rental Sale Profit Affect on Tax Bracket (Rate) Question
« Reply #7 on: July 18, 2016, 08:24:17 AM »
You were right (assuming this qualifies as a long-term capital gain) - 15% on the $4700.  The 20% bracket for LTCG doesn't kick in until the 39.6% regular tax bracket - over $400K in taxable income regardless of filing status to get there.

Thank you dandarc.

I think I have it sorted now. LTCG's taxes are calculated based on the tax bracket you are in, but they do not cause you to move from one tax bracket to another, only ordinary income does that (of course that is simplified).
« Last Edit: July 18, 2016, 08:26:01 AM by Rollin »