Will I have to pay capital gains tax on sale of property?

Question

Hello everyone. I am about to sell a rental property that will result in 50k-75k in profit. The question I have, which I haven't been able to find a clear answer on, is will I have to pay the 15% tax on gains or 0%. My taxable income is under the 2020 bracket of 78K, but that is before the sale of the property? Will that add to my taxable income and push me from the 0% to 15% bracket? I have done all of the online capital gains calculators with depreciation recapture and improvements, which definitely result in a capital gain.

My intentions are to put the profits from the sale into a couple of rental properties. The house is on the market already, so a 1031 is out of the question since I do not have a future property identified yet.

Thank you for your responses in advance.

James

My intentions are to put the profits from the sale into a couple of rental properties. The house is on the market already, so a 1031 is out of the question since I do not have a future property identified yet.

Thank you for your responses in advance.

James

Account Closed · Answer

Go to Staples, buy a software tax package, (it's maybe $100). Load the software. They take you step by step. Fill out the personal income information and the rental & sale information and it will tell you what your tax liability is. For a single property it's simple to do. Then, play around with various options to see how it affects things.ie What if you did a flip, what if you sold a property you hadn't rented out, what if you assigned a contract. To be a good investor and for only one rental property you should learn what affects your taxes and what doesn't. It makes a huge difference in how much you get to keep.

When you get to owning multiple properties and do various types of investing (more than just rentals) you'll need the guidance of a tax professional. I could answer your question for you but you are asking an incomplete question and you will apply the answer to every situation. It doesn't work that way with taxes.

For you be successful in the future you need a basic understanding of the tax code. That is why doing the easy taxes yourself is so important for you.

Nolan O. · Answer

@James Black

Have you looked into investing the gains in a qualified opportunity zone?

David M. · Answer

@James Black

You should wind up paying 15% on the profit over the limit.  Meanwhile, you have the depreciation unrecapture to deal with.  That’s not a straight forward determination with the way it worms it way on SchD’s questions on the second page and the potentially two tax worksheets.  Your depreciation unrecapture looks to me to be somewhat dependent on the rest of your capitals gains overall

Dave Foster · Answer

@James Black, sure thing.  I just sent you a pm.

James Black · Answer

@Dave Foster Would you be able to discuss over the phone?

Dave Foster · Answer

@James Black, The part of your gain that is attributed to depreciation recapture will be recaptured regardless at 25%.  So even if you were to stay under the 0% thresh hold (unlikely with any kind of sale) you'll still have depreciation recapture unless you do the 1031.

Carlos Miranda · Answer

A 1031 exchange would be out of the question if you do not find a property within 45 days of selling your rental unit. So when your rental sells, then you have 45 days to identify a property and 180 days to close on that property.

Will Fraser · Answer

Hi @James Black, I'll forego the obvious clarifications about consulting a tax advisor (which I am not) and jump right to it:  unless you have lived in the property as your primary residence for 2 of the past 5 years you will be looking at capital gains.  If you have owned it for 1 year or less it would be short term capital gains, treated as additional income.  If you have owned it longer than that you'll likely be looking at a 15% long-term treatment.

Capital Gains are assessed on gains, so you'll not be taxed on the costs of improvements or costs of sale, as that would not be a gain.

You may still be able to exchange this property, but you'll gain the needed clarity by speaking with an exchange company.