Sale of rental house and taxes owed question

[Earl E Retyre]

I wanted to verify my understanding from any tax experts out there …

DW and I have a rental property that we are planning to sell next year. I assume as long as the capital gains (combined with my dividends) are less than $78,750 then we owe nothing for capital gains tax.

So, let's assume:
Sell the house: $400k
Purchased the house 5 years ago: $300k
Realtor fees, closing costs, and remodel costs: $40k
Net Profit (Capital Gain): $60k
Assume dividends from investments: $10,000
No other capital gains.
Since Net Profit plus Dividends ($70k) is less than $78,750 then we owe no capital gains tax.

Assume total depreciation over the 5 years rental: $12,000
Depreciation recapture (I believe is 25% of amount depreciated): $3,000

So, total net profit is $57k

Is that all correct? Also, I assume if we go over $78,750 in profit then I am only taxed 15% for the amount above $78,750.

TIA

 

[RunningBum]

It's more than capital gains and dividends, it's regular income as well.

See this post and the one that follows. http://www.early-retirement.org/for...-conversion-this-year-100754.html#post2324695 .
Other posts in that thread also explain it.

 

[kaneohe]

............................
So, let's assume:
Sell the house: $400k
Purchased the house 5 years ago: $300k
Realtor fees, closing costs, and remodel costs: $40k
Net Profit (Capital Gain): $60k
Assume dividends from investments: $10,000
No other capital gains.
Since Net Profit plus Dividends ($70k) is less than $78,750 then we owe no capital gains tax.

Assume total depreciation over the 5 years rental: $12,000
Depreciation recapture (I believe is 25% of amount depreciated): $3,000

So, total net profit is $57k

Is that all correct? Also, I assume if we go over $78,750 in profit then I am only taxed 15% for the amount above $78,750.

TIA

You lost me after the 70K part. 12K depreciation recapture adds to income to get 82K AGI. 24K or so std deduction gets taxable income of 58K. If taxable income goes over the 78+K threshold, the capital gains/QDIV above that gets taxed at 15%.

 

[Cobra9777]

We sold a rental house a couple years ago. The tax hit was not bad at all, including so-called recapture. Rather than retype the whole story, here's a link to a couple posts I made back then:

http://www.early-retirement.org/for...al-gotcha-for-retirees-86004.html#post1856646

http://www.early-retirement.org/for...-gotcha-for-retirees-86004-2.html#post1856751

 

[cathy63]

I wanted to verify my understanding from any tax experts out there …

DW and I have a rental property that we are planning to sell next year. I assume as long as the capital gains (combined with my dividends) are less than $78,750 then we owe nothing for capital gains tax.

So, let's assume:
Sell the house: $400k
Purchased the house 5 years ago: $300k
Realtor fees, closing costs, and remodel costs: $40k
Net Profit (Capital Gain): $60k
Assume dividends from investments: $10,000
No other capital gains.
Since Net Profit plus Dividends ($70k) is less than $78,750 then we owe no capital gains tax.

Assume total depreciation over the 5 years rental: $12,000
Depreciation recapture (I believe is 25% of amount depreciated): $3,000

So, total net profit is $57k

Is that all correct? Also, I assume if we go over $78,750 in profit then I am only taxed 15% for the amount above $78,750.

TIA

First, note that since this sale will occur in 2020, you'll be using the 2020 0% cap gains bracket which goes up to $80K and the MFJ standard deduction, which will be $24.8K.

Depreciation recapture is taxed like ordinary income, except that the tax is capped at 25%. You and your spouse would need to have other taxable income of $326K (top of the 24% bracket) before you would owe the full 25% on your depreciation recapture.

Otherwise, it really depends what other income you have. How much rent are you going to collect from this property before you sell it next year? Do you have any other ordinary income from tIRA withdrawals, Roth conversions, pensions, jobs, etc? Are those $10K dividends ordinary or qualified?

If you will collect no rent and have no other income than what you've mentioned here, then you'll owe $0 in taxes. The $12K of depreciation recapture and any ordinary dividends in that $10K are offset by the $24.8K standard deduction, and the 0% bracket for cap gains more than covers the rest.

 

[Sunset]

I wanted to verify my understanding from any tax experts out there …

DW and I have a rental property that we are planning to sell next year. I assume as long as the capital gains (combined with my dividends) are less than $78,750 then we owe nothing for capital gains tax.

So, let's assume:
Sell the house: $400k
Purchased the house 5 years ago: $300k
Realtor fees, closing costs, and remodel costs: $40k
Net Profit (Capital Gain): $60k
Assume dividends from investments: $10,000
No other capital gains.
Since Net Profit plus Dividends ($70k) is less than $78,750 then we owe no capital gains tax.

Assume total depreciation over the 5 years rental: $12,000
Depreciation recapture (I believe is 25% of amount depreciated): $3,000

So, total net profit is $57k

Is that all correct? Also, I assume if we go over $78,750 in profit then I am only taxed 15% for the amount above $78,750.

TIA

Not sure how you get that number of $12K over the 5 years.
Even if your property was in a foreign country, depreciation spread over 40 years still works out to $7,500 per year * 5 years = $37,500 depreciation (approx).
So your recapture is a LOT more than you are stating.

If your property is in USA , you have to depreciate over a (approx) 27.5 yr span then the depreciation will be (approx) $50,000 to be recaptured.

 

[Winemaker]

Only the house is depreciated tax wise; the land doesn't. You declared the value of the land on your return the first time you claimed income and the building's worth.

 

[Sunset]

Only the house is depreciated tax wise; the land doesn't. You declared the value of the land on your return the first time you claimed income and the building's worth.

Right of course.
So OP's house was worth $66,000 and the land was $234,000 in value.
Must be a shack on the waterfront.

 

[ncbill]

Move into the house for a few months to get the $250k/person exemption? (isn't it pro-rated?)

 

[pb4uski]

It gets complicated.

https://www.merriman.com/wealth-pre...to-your-rental-in-the-future-read-this-first/

 

[RunningBum]

Move into the house for a few months to get the $250k/person exemption? (isn't it pro-rated?)

Everything I've read is that it has to be 2 out of the last 5 years that you've lived in the house. No pro-rating if it's less than 2 years.

I own a townhouse that my son has lived in for the last 3+ years, rent free. He's moving so I'm faced with a sale that will have enough gains to push me out of the ACA subsidy, not to mention that cap gains tax itself. I've never deducted any expenses, though I have added improvements I've made to the basis. I'm mildly tempted to see what "living" in the town house for 2 years really means, but I really don't want to actually live there for 2 years, and I don't want to get my mail an hour from my house, and I don't want to deal with an audit that I couldn't pass just to save a few thousand. So I'll just bite the bullet unless anyone has another idea.

 

[pb4uski]

Would a 1031 exchange to a similar townhouse nearer to you that you could rent until you are Medicare eligible work?

Or perhaps a 1031 exchange to something in an area and of a form that you would like living in and then convert the rental to your personal residence and then sell your current personal residence?

 

[kaneohe]

Everything I've read is that it has to be 2 out of the last 5 years that you've lived in the house. No pro-rating if it's less than 2 years.

.......................................

and even if you make the 2 yrs, as pb4 says it get complicated. Forget the details but they passed a law some time ago to address the smart guys who moved back into a rental to get the 250K exemption.......something like the gain from some date would be pro-rated between rental time and ownership time so you would only get part of the 250K.

 

[Another Reader]

Everything I've read is that it has to be 2 out of the last 5 years that you've lived in the house. No pro-rating if it's less than 2 years.

I own a townhouse that my son has lived in for the last 3+ years, rent free. He's moving so I'm faced with a sale that will have enough gains to push me out of the ACA subsidy, not to mention that cap gains tax itself. I've never deducted any expenses, though I have added improvements I've made to the basis. I'm mildly tempted to see what "living" in the town house for 2 years really means, but I really don't want to actually live there for 2 years, and I don't want to get my mail an hour from my house, and I don't want to deal with an audit that I couldn't pass just to save a few thousand. So I'll just bite the bullet unless anyone has another idea.

Did you not take depreciation as an expense? My understanding is you will have to pay tax on the depreciation you would have taken, whether or not you took it.

 

[pb4uski]

+1

 

[RunningBum]

Did you not take depreciation as an expense? My understanding is you will have to pay tax on the depreciation you would have taken, whether or not you took it.

No, I did not take depreciation as an expense. It was not a rental. I did not get any income. It's been a personal use home that I let my son live in for free, as I said in my previous post. Most or all of the comments you all are making seem to apply to rental properties. As a personal use home I don't believe I have to factor in depreciation. I do understand that had I rented it, I would have to use depreciation even if I didn't expense it, but that's not my case.

I think that also means I can't do a 1031 swap unless I rent the townhouse out first, and rent the new property, if I understand how the swap works. That's getting into headache territory. I'm not interested in being a landlord.

Possibly I should've set the townhouse up differently with my son, but I looked at the situation pretty closely 3-4 years ago when I did this and was convinced this was the best way. If it wasn't, too late now. But the way it looks now, I'll make a big enough profit after taxes to easily overcome loss of the ACA subsidy next year, and I can use the opportunity to put a major dent in my tIRA with conversions. And the subsidy is smaller next year than it was this year.

 

[cathy63]

Everything I've read is that it has to be 2 out of the last 5 years that you've lived in the house. No pro-rating if it's less than 2 years.

I own a townhouse that my son has lived in for the last 3+ years, rent free...

Did you not take depreciation as an expense? My understanding is you will have to pay tax on the depreciation you would have taken, whether or not you took it.

This property was not rented out, so there should be no depreciation recapture. It's more like selling a second home.

 

[Sunset]

I own a townhouse that my son has lived in for the last 3+ years, rent free. He's moving so I'm faced with a sale that will have enough gains to push me out of the ACA subsidy, not to mention that cap gains tax itself. I've never deducted any expenses, though I have added improvements I've made to the basis. I'm mildly tempted to see what "living" in the town house for 2 years really means, but I really don't want to actually live there for 2 years, and I don't want to get my mail an hour from my house, and I don't want to deal with an audit that I couldn't pass just to save a few thousand. So I'll just bite the bullet unless anyone has another idea.

You could turn it into a rental instead of a second home, to wait out the ACA subsidy time.
Be sure to get some appraisal on the new updated value of the house.
Once you are 65, then sell the rental house.

 

[RunningBum]

I shouldn't have side tracked this thread. Apologies to Earl E. if their questions are not yet answered.

 

[Another Reader]

My bad. I referred back to the OP and saw that property was a rental...

 

[RunningBum]

My bad. I referred back to the OP and saw that property was a rental...

It's my fault for threadjacking. Easy to get confused when that happens.

 

[Earl E Retyre]

I shouldn't have side tracked this thread. Apologies to Earl E. if their questions are not yet answered.

No worries. I got the helpful answers I was looking for.

I learned 2 things that affect my situation:
1) There is no way I will get 0% capital gains rate since I did not realize that this includes all regular income as well. So, 15% it is.
2) the 25% is a max rate on capture depreciation. So, it is possible I pay 15% on that amount. Although that is the smaller of the taxable hits.

Feel free to hijack the thread away …