Author Topic: Tax on sale of rental property  (Read 2563 times)

brandino29

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Tax on sale of rental property
« on: January 03, 2016, 11:09:21 AM »
We're likely going to be putting our small SFH rental on the market in the next few weeks as our current renter's lease is up and moving out at the end of the month.  We paid $65k for it a couple of years ago and I expect to sell it pretty quickly for $85kish so I'm expecting around $20k in total profit.

I had never before considered the tax implications of the sale and now I'm wondering how big of a tax hit we could potentially take on it.  From my internet searches it looks like investment property is taxed as capital gains at 20% -- I'm wondering if we could instead include the profit as part of our total household income which is currently only $40k.  If so, it would substantially reduce our tax burden on the sale.   

rachael talcott

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Re: Tax on sale of rental property
« Reply #1 on: January 03, 2016, 08:33:05 PM »
It would not be taxed at a flat 20%. 

Because you've held it for over a year, it's considered a long-term capital gain.  The amount of the gain using your numbers is $85K - 65K - depreciation.  Depreciation is just on the building, not the land.  Look at your old tax returns to figure out how much you depreciated it during the time you've owned it.

The happy news is that if you are married filing jointly you are not even close to the point where you'd have to pay federal income tax on this gain.  You would have to pay depreciation recapture.  But given that you have not owned the property long, that should not be a huge amount.  Also you may owe state tax.

Congrats on making a good investment!

zephyr911

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Re: Tax on sale of rental property
« Reply #2 on: January 04, 2016, 08:32:52 AM »
Because you've held it for over a year, it's considered a long-term capital gain.  The amount of the gain using your numbers is $85K - 65K - depreciation.  Depreciation is just on the building, not the land.  Look at your old tax returns to figure out how much you depreciated it during the time you've owned it.
Small point of order: if you didn't claim depreciation, you still have to count the depreciation you should have claimed.

rachael talcott

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Re: Tax on sale of rental property
« Reply #3 on: January 04, 2016, 05:06:25 PM »
Quote
Small point of order: if you didn't claim depreciation, you still have to count the depreciation you should have claimed.

Good point! 

brandino29

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Re: Tax on sale of rental property
« Reply #4 on: January 04, 2016, 06:40:46 PM »
Interesting, I must have found older resources referring to the 20% capital gains tax. I did take depreciation on it as the tax software I used always worked it in. 

Avoiding federal taxes would be great!

Thanks for the insight.

bacchi

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Re: Tax on sale of rental property
« Reply #5 on: January 04, 2016, 08:42:26 PM »
Depreciation recapture will be 25%. No way around that.

brandino29

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Re: Tax on sale of rental property
« Reply #6 on: January 04, 2016, 09:03:11 PM »
I've read a handful of articles from sites like investopedia and nolo and I'm still a bit fuzzy on how the final tax calcs will work. Already getting the feeling this maybe the first time I have to pay a professional tax service to help me prepare my tax return. 

We bought the property in 2013 so we'll only have three years of depreciation, I don't recall how much the depreciation was each year but can't imagine it was all that much on a 50 year old house we bought for $65k.

zephyr911

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Re: Tax on sale of rental property
« Reply #7 on: January 05, 2016, 06:56:23 PM »
I've read a handful of articles from sites like investopedia and nolo and I'm still a bit fuzzy on how the final tax calcs will work. Already getting the feeling this maybe the first time I have to pay a professional tax service to help me prepare my tax return. 

We bought the property in 2013 so we'll only have three years of depreciation, I don't recall how much the depreciation was each year but can't imagine it was all that much on a 50 year old house we bought for $65k.
Assuming a land value of $10k, $55k in improvements on a standard 27.5-yr MACRS straight line would depreciate at $2k annually for a total of $6k. Adjusted basis: $59k.
Should be in that ballpark.

rachael talcott

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Re: Tax on sale of rental property
« Reply #8 on: January 05, 2016, 07:01:44 PM »
What Zephyr said and also

Quote
Already getting the feeling this maybe the first time I have to pay a professional tax service to help me prepare my tax return. 

If you use something like Turbotax, it will save information from previous returns.  All you'd need to do is enter the sale into the software and it will do the calculation for you.