Taxes after selling a rental property

Taxes after selling a rental property

Long Beach, CA · Member since 2017 · 8 posts · 0 votes

Team BB,

How much money should I hold onto from the sale to prepare for tax time? 

I had a tax question I was hoping you could answer about a rental that I've recently sold (did not do a 1031). There's three places I've identified were I could have (or have already paid in advance) to pay taxes but I'm not sure.  I could be completely wrong.  The rental was bought for 244k and sold for 262k.  I had the home for 10 years and benefited from depreciation.   

  1. The portion of the gain. In my case it's 262k-244k = 18k. 18k would then be taxed at 20% (or 25%)?
  2. Depreciation recapture. In my case it's 244k-44k (10 years of depreciation). The 44k would be taxed at 15%?
  3. CA Franchise tax board. Escrow withheld .0333% = $8724.60 as a prepayment come tax time.  I have no idea where this came from, it was like a sniper in the woodline.   

Is the amount in #3 is intended to pay a part of #1 or #2, or if it's a separate tax?  I also don't know if my understanding is correct for #1 & #2?

Given that escrow is holding onto $8724.60 I want to know what I will have to pay, if anything, come tax time?

Thank you in advance for tackling this!

Tobey

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Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y

Cap gains 15-20%

Recapture ordinary income tax, up to 25%

Left Coast tax-no idea.

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  • Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    9y

    Cap gains 15-20%

    Recapture ordinary income tax, up to 25%

    Left Coast tax-no idea.

  • Long Beach, CA · Member since 2017 · 8 posts · 0 votes
    9y

    Left coast tax....  I actually laughed out loud.  Thanks for the input Wayne. 

  • CPA · Miami, FL · Member since 2015 · 131 posts · 83 votes
    9y

    @Tobey Humphries Did you make any capital improvements to the property during the 10 years you held it? If so, the cost basis of the property would include capital improvements which would reduce the gain. Capital improvements include any major repairs, such as the roof, that were not fully expensed in any given year. In addition, selling costs such as realtor fees and closing costs are deducted from the sales price. This also reduces the gain. As @Wayne Brooks explained, capital gain tax rates range from 0%-20% (for your purposes, I would estimate 15%) and depreciation recapture is taxed at a maximum of 25%.

  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    @Tobey Humphries That $8,000 escrow is holding is likely an excise tax that California has. 

    It's based on actual sale price of the home, and is basically a sales tax on transfer of real estate. That would be my guess to why escrow is holding it. Unfortunately it doesn't save at all for your actual federal/state tax liability. 

    You will have capital gains tax at the federal level of 0-20% most likely

    And depreciation recapture at 25%

    Additionally, California taxes the gain at your ordinary income rate. 

    It never hurts to have a professional file for the year of sale to ensure your basis is calculated correctly, and any applicable repairs/costs that were incurred that may reduce the gain are utilized. 

    Hope this helps!

  • Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    9y

    @Tobey Humphries

    When you ask if the depreciation recapture tax rate will be 15%, are you using this number because that is your marginal tax bracket rate?  If so, then yes, depreciation will be recaptured at your marginal tax bracket rate.  Now, if your marginal tax bracket rate is 15% the long term capital gains tax rate is 0% for your tax bracket.  

    In this case, on your federal income tax return, expect to pay (0% * $18K) + (15% * $44K) = $6.6K in taxes due to the sale of your investment property.  

    It is my understanding (please verify for yourself) that the CA state income tax is a straight 9%.  From your numbers, it seems that your profit on the sale is $62K (sale price minus ajusted basis) giving you a CA state tax of about $5.6K.  I am guessing that the state withheld $8764 which you can claim as addditional withholding on your next CA tax return and receive a refund of any excess withholding. 

  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Tobey Humphries, 

    California has a mandatory withholding requirement of 3 1/3% of the gross sale price unless you qualify for any of the exemptions. You can review the requirements and the related exemption by reading California Franchise Tax Board Form 593, or a summary of the exemptions on CA FTB Form 593-C. This withholding is merely an estimated tax payment made toward the taxes that you will ultimately owe. You should claim a credit for this amount as taxes paid when you file your California Income Tax Return.

    California does not have a flat percentage tax rate, but varies with your income tax bracket.

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  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 625 posts · 336 votes
    9y

    @Tobey Humphries Escrow can only hold tax if you let them.

  • Long Beach, CA · Member since 2017 · 8 posts · 0 votes
    9y

    Thank you everyone for your responses.    I won't lie, my head hurts after trying to figure it out.  I'm truly greatful for your input. 

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