Author Topic: Does the net profit from the sale of a rental property count as income on taxes?  (Read 1557 times)

zinethstache

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I am researching the formulas for calculating Capital Gains on the sale of rental property .

We earn around 32k/year (FIRE'd).

DH wants to sell our Triplex to pay off another rental property.

Will the net of that sale increase our taxable income?

I ask because according to the capital gains calculation, if we earn in the bottom two lowest tax rates (which we do) we do not pay any gains, however if proceeds from the sale count as income, we will jump up to the 25% tax rate and thus will be on the hook for 15% capital gains.

We do have a CPA, but right now it is peak tax season so I thought I'd see if any other investors have experienced this type of transaction and know the answer.

Thanks in advance!

rpr

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I am researching the formulas for calculating Capital Gains on the sale of rental property .

We earn around 32k/year (FIRE'd).

DH wants to sell our Triplex to pay off another rental property.

Will the net of that sale increase our taxable income?

I ask because according to the capital gains calculation, if we earn in the bottom two lowest tax rates (which we do) we do not pay any gains, however if proceeds from the sale count as income, we will jump up to the 25% tax rate and thus will be on the hook for 15% capital gains.

We do have a CPA, but right now it is peak tax season so I thought I'd see if any other investors have experienced this type of transaction and know the answer.

Thanks in advance!

Not a CPA or Tax Professional but this should add to your income. However, only the amount of income in the 25% and above brackets will attract the CG tax. Try a calculator to see what will happen. Also I assume that you are aware that there will be depreciation recapture taxes as well which are calculated at ordinary income tax rates. Consult the CPA.  But there are things like 1031 exchange that can help avoid this tax. But not sure if the 1031 applies when proceeds from sale are used to pay off existing mortgage. 

https://ptmoney.com/depreciation-recapture/

http://www.wgcpas.com/news/alerts/405-tax-matters-tax-implications-of-depreciation-recapture-when-selling-real-estate

zinethstache

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I've got a clear handle on depreciation recapture, as well as 1031 which will not apply here.

Yes the amount we will clear puts us well into the 25% bracket. So we will pay regular taxes + capital gains if it counts as income...


MaikoTsumi

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If you've had it over a year, you are only taxed capital gains.  It's not income.

zinethstache

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I did some more digging and found a good explanation on nerdwallet.com. The post is a bit old,2015. I do need to verify this wasn't changed by the new tax changes.

https://www.nerdwallet.com/ask/question/do-capital-gains-affect-tax-bracket-26135

I read this as you do add the capital gain to calculate which tax bracket you are in, but you are taxed at the appropriate Capital Gains tax rate, not your tax bracket rate.



MaikoTsumi

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Look, you're wanting to know if your ordinary income is tax higher right?  Ordinary income is taxed at your rate. Next, capital gains are taxed at the rate based on your income.  Those capital gains are added to your AGI, and this affects deductions you can take and phase outs thereby.  So your tax only goes up if your capital gains are enough to affect credits/deductions you would have taken.

FatFI2025

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I did some more digging and found a good explanation on nerdwallet.com. The post is a bit old,2015. I do need to verify this wasn't changed by the new tax changes.

https://www.nerdwallet.com/ask/question/do-capital-gains-affect-tax-bracket-26135

I read this as you do add the capital gain to calculate which tax bracket you are in, but you are taxed at the appropriate Capital Gains tax rate, not your tax bracket rate.




Yes your interpretation is correct. The sale will be included on 1040 line 13 and so it is included in total income. The capital gain is unearned income, which is subject to more favorable rates than earned income in the US.

What is the anticipated capital gain on the property? If it's small enough, you might be able to do some strategizing to get below the 77k limit. Also you could explore a structured sale to minimize the tax impact.

Also, depreciation recapture is at a special 25% rate, not at your earned income tax rate.

primozaj

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Does the cost basis (due to improvements) of the house not affect the capital gains portion or is that only for the recapture of depreciation?