I owe Uncle Sam What?

December 27, 2007 at 2:52 pm | Posted in Uncategorized | Leave a comment
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I recently had to send this information to a client. I think it is worth sharing with all my faithful readers….

Owning an investment property can be rewarding both mentally and financially.  There is a point in time when the investor wants to sell it and move on to something else.  When that time starts to creep into one’s head, you must take into account the tax ramifications of selling the property.  I know it is not a fun thought that Uncle Sam is going to take a tax bite out of any financial gain you made from all your sweat and toil from the investment.  It is important to have an idea as to what the Capital Gain taxes will be so that if you  are going to reinvest the money elsewere you know how much you are going to be working with.  Below is an example that illustrates how the Capital Gain Tax is calculated for an investment/rental property.

Capital Gain is defined as the amount by which the selling price of an asset exceeds the purchase price; the gain is realized when the asset is sold.

To determine the gain or loss on the sale of your rental property, you need to determine the selling price, the adjusted basis, plus subsequent capital improvements, and minus depreciation.

EXAMPLE:  Nolan purchased a residential property 5 years ago for $200,000.  He plans on selling it now for its current market value of $475,000.  Nolan has taken an annual depreciation exspense of $5,400 resulting in a total of $27,000 ($5,400 x 5 years).  Over the same time he made improvements at a cost of $10,000.  His cost associated with the sale of the property are $10,000.  The taxable gain on the sale is determined as follows:


Original Cost                          $200,000

Improvements                           10,000

Depreciation                              (27,000)

Adjjusted Basis                       $183,000


Sales Price                         $475,000

Adjusted Basis                  (183,000)

Selling Costs                         (10000)

Taxable Gain                   $282,000

Nolan’s taxable gain of $282,000 will be taxed at two different rates, one for the depreciation ($27,000) and the other for the remainder of the gain $255,000 ($282,000-$27,000).

Since Nolan took a depreciation deduction during the time he owned the rental property, he would need to recpature the cost.  Under current law, depreciation recapture is taxed at a maximum federal tax rate of 25%.  Nolan will owe $6,750 due to the depreciation ($27,000 x 25%).

The remainder of his gain, $255,000, will be taxed at whatever capital gains tax applies to him.  Let’s assume Nolan has a capital gain tax rate of 20%.  He will owe $51,000 in taxes on the remainder of his gain ($255,000 x 25%).  Thus, Nolan’s total federal taxes due will be $57,750 ($51,000 + $6,750).

Make sure you check with the state you are in since each state has its own capital gains tax rate.

 Please call on me if you have any questions…


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