Rental Property being sold at a gain in utah
Member since 2018 · 1 post · 0 votes
Rental Property being sold at a gain in utah
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
8yI highly recommend consulting with your accountant about rental property sales.
I assume you have been reporting the rental on taxes since you bought it. Part of that involves tracking depreciation on the property. Depreciation decreases your basis. Your basis starts at the price you paid plus closing costs. You add any capital improvements you've made. You subtract the amount of depreciation taken or allowed, whichever is larger. This will be your basis when you sell. Some of what you've spent getting it ready to sell adds to the basis, some is immediately deductible. Again, consult with your accountant.
When you sell, your gain on the sale is the selling price, less selling costs, less your basis. If you have carry forward disallowed passive losses those would be subtracted, too. Your gain is split into two parts. First, the amount of gain up to the depreciation taken or allowed (whichever is greater) is subject to the tax on unrecaptured depreciation. That's at your ordinary tax rate, but capped at 25%. Any remaining gain would be subject to capital gains taxes. I think that's 15%, but this may have changed in the new tax law.
If you've not been claiming the rental income on taxes and carefully tracking the assets associated with this property you will need to do some work to sort this out. You've owned this property for 13 years. That means the allowed depreciation is 13/27.5 of the value of the improvements. That's almost half. So, if you paid $100K and the land was worth $20K, you would have been allowed 13/27.5 * $80K = about $38K. Considering nothing else, your basis would be $62K. If you were to net $150K on the sale after selling costs, you would have $88K of gain. Of that, $38K would be subject to the tax on unrecaptured depreciation and $50K would be subject to capital gains taxes. In reality this is much more complex because of purchase closing costs, improvements over time, and the fix up work you've done to sell it.
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- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes8y
I highly recommend consulting with your accountant about rental property sales.
I assume you have been reporting the rental on taxes since you bought it. Part of that involves tracking depreciation on the property. Depreciation decreases your basis. Your basis starts at the price you paid plus closing costs. You add any capital improvements you've made. You subtract the amount of depreciation taken or allowed, whichever is larger. This will be your basis when you sell. Some of what you've spent getting it ready to sell adds to the basis, some is immediately deductible. Again, consult with your accountant.
When you sell, your gain on the sale is the selling price, less selling costs, less your basis. If you have carry forward disallowed passive losses those would be subtracted, too. Your gain is split into two parts. First, the amount of gain up to the depreciation taken or allowed (whichever is greater) is subject to the tax on unrecaptured depreciation. That's at your ordinary tax rate, but capped at 25%. Any remaining gain would be subject to capital gains taxes. I think that's 15%, but this may have changed in the new tax law.
If you've not been claiming the rental income on taxes and carefully tracking the assets associated with this property you will need to do some work to sort this out. You've owned this property for 13 years. That means the allowed depreciation is 13/27.5 of the value of the improvements. That's almost half. So, if you paid $100K and the land was worth $20K, you would have been allowed 13/27.5 * $80K = about $38K. Considering nothing else, your basis would be $62K. If you were to net $150K on the sale after selling costs, you would have $88K of gain. Of that, $38K would be subject to the tax on unrecaptured depreciation and $50K would be subject to capital gains taxes. In reality this is much more complex because of purchase closing costs, improvements over time, and the fix up work you've done to sell it.
- 8yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Kristi Hill, @Jon Holdman is spot on. Emphasis on depreciation recapture. 13 years is almost half of the economic life of that asset. And the IRS will make you recapture if even if you didn't take it as a write off. That's going to be on top of that $60K gain you anticipate and taxed higher - 25%.
So it's big tax bill or a 1031 exchange which would allow you to sell this property and purchase other investment property and defer those taxes indefinitely.
The 1031 Investor5137 Reviews - Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes8y
@Kristi Hill That was very nice of you! But as @Dave Foster and @Jon Holdman stated you're in for a big tax bill on it. If you haven't taken depreciation the IRS will still hit you for it. The way to fix that is filing Form 3115 which lets you catch up on missed depreciation. In that case the depreciation would be a wash unless your marginal tax rate is over 25% and then you'd actually get more tax benefit from the depreciation adjustment than what you lose on recapture since it's capped at 25%.
If you plan on buying another rental property definitely look into a 1031 to avoid the recapture and capital gains.
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