Investment Property Sale Taxes

[ferco]

Bought investment property in 2000 for 60k and for various reasons needed to sell in 2006 for 60k. I've taken depreciation of $2,300 per year. We're in the 25-30% tax bracket. I need to get an estimate of what the fed taxes will be on this sale...any accounting folks out there?

 

[tryan]

The depreciation will be "recaptured" (given back). Otherwise if you sold for what you paid no other tax is owed.

 

[ferco]

In recapturing the depreciation will that not lower my cost basis and thus the spread between the purchase and the sell price. This then will result in a capital "gain" and taxes owed even though I bought and sold property for the same amount?

 

[Arif]

The recaptured depr. taxes would be owed from 2000 to current at the 25% rate. So you would owe taxes on approximately $16,100 (depending on prorated dates on the buy and sell side).Property depreciation recapture is always at the 25% rate. So if you sold the property for what you bought it for, 60k then you would have 0 long term gain which would have been taxed at 15% if there was any profit to be taxed.

DISCLOSURE: I am not an accountant but I did stay at a Holiday Inn.

 

[ferco]

Arif,
Are you saying that the fed tax would be approx. $4,000 (16k x 25%)? Also, my assumption would be that this figure would be lowered by any current year losses against the property. Would the depreciation for '06 be a "wash" since you're going to recapture it anyway on the return?

 

[Arif]

Arif,
Are you saying that the fed tax would be approx. $4,000 (16k x 25%)? Also, my assumption would be that this figure would be lowered by any current year losses against the property. Would the depreciation for '06 be a "wash" since you're going to recapture it anyway on the return?

I think the operating expenses for current year would offset any long term cap gains that were incurred in '06 and not the depreciation recapture. I could be wrong but I am pretty sure that's the way the IRS will look at it.

BTW- For those with a bit more complicated real estate transation, you can plug in your figures here to get an estimate on how much taxes are owed to the Man: http://www.1031x.com/tax_calculator.cfm

 

[Martha]

I don't have a citation in front of me, but losses can be offset against recaptured depreciation, that is "unrecaptured section 1250 gain."

 

[ferco]

Arif,
Thanks for the "1031" web site. I'm probably sitting at about $3,700-4,000 taxes owed BEFORE deducting the losses for the year, so I think I should be OK. Also thanks to Martha for the "citation" note.

Ferco

 

[macdaddy]

If property has been fully depreciated, but is then inherited by someone else, can the new owner start depreciating all over again?

 

[Martha]

If property has been fully depreciated, but is then inherited by someone else, can the new owner start depreciating all over again?

Yup. The magic of a stepped up basis!

 

[spideyrdpd]

I am just curiuos if the sale is to a relative since there might be other ways to do it .
Although since your tax hit is small it may not matter.
Rob
(Martha I know they are probaly too complicated )

 

[macdaddy]

I assume that if it works for inheritance it works for gifting also. What if the property is put into a corporate structure and then corporate shares are gifted to a child over a period of time (11k/year or whatever the max is from each parent). How is the new basis determined? At the time of transfer into the corporation, the parents own 100% of the shares.

 

[Martha]

I assume that if it works for inheritance it works for gifting also. What if the property is put into a corporate structure and then corporate shares are gifted to a child over a period of time (11k/year or whatever the max is from each parent). How is the new basis determined? At the time of transfer into the corporation, the parents own 100% of the shares.

A gift has the same basis as the giver has, no step up. So if the parents had little or no basis in the corporate shares, the kids won't either.

The reason to do the gifting may be to avoid inheritance taxes on what is gifted.