Capital Gains/Dep Recapture If Not Above 2nd Tax Bracket

Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
10y
@Steven Hamilton II ?
But, as a non CPA...$60k of depreciation, and only $15k of cap gains seems odd, even with a tremendous amount of capital improvements. You've had the property long enough for $60k in depreciation, but with only a $15k net increase in value? Then again, I guess buying a $200k property, at the top 10 years ago, might fit that. But, I believe you'll pay 25% on the depreciation recapture, and 15% on the cap gains.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Payman A.:

Hi all. So after looking through pages of previous posts/replies, I did not find a topic that covers my exact question so I'm submitting this one.
Can someone please clarify how capital gains and depreciation recapture are taxed when selling a long term investment if for example:
- There is $60K worth of depreciation
- There is $15K worth of gains on top of depreciation
- Taxable income for us, a married couple, is $50K
Thank you all in advance,
Payman
Is that taxable income OR Is that your agi? Big difference. The 60k will be taxed in your 15% bracket and then at 25% once it passes that threshold. Your capital gain is last and at a max of 20% but in your described scenario it is only 15%.
Without having your itemized deductions I can't run a detailed scenario other than to give you that example. I know I posted on this topic a detailed example a month ago. Maybe 6 weeks.
sorry for typos, on mobile.
[email protected]224-381-2660
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Payman A.
OP
Los Angeles, CA · Member since 2015 · 117 posts · 13 votes
10y
Originally posted by @Wayne Brooks:

@Steven Hamilton II ?
But, as a non CPA...$60k of depreciation, and only $15k of cap gains seems odd, even with a tremendous amount of capital improvements. You've had the property long enough for $60k in depreciation, but with only a $15k net increase in value? Then again, I guess buying a $200k property, at the top 10 years ago, might fit that. But, I believe you'll pay 25% on the depreciation recapture, and 15% on the cap gains.
Yes, pretty much right on as to when it was purchased
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Payman A.
OP
Los Angeles, CA · Member since 2015 · 117 posts · 13 votes
10y
I appreciate the reply. I'm using a taxable income example and what you outlined confirms what I was thinking. So even if you are exempt from CG tax because you do not go above the 2nd tax bracket, dep.recapture is always considered ordinary income. Hmmm...might have to consider a 1031 even though I don't like the idea of deferring anything.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
I love deferring everything. Why not?
[email protected]224-381-2660
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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
10y
Originally posted by @Payman A.:

I appreciate the reply. I'm using a taxable income example and what you outlined confirms what I was thinking. So even if you are exempt from CG tax because you do not go above the 2nd tax bracket, dep.recapture is always considered ordinary income. Hmmm...might have to consider a 1031 even though I don't like the idea of deferring anything.
Is the property in California? They have a significant tax to collect as well.
Mark
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Payman A.
OP
Los Angeles, CA · Member since 2015 · 117 posts · 13 votes
10y
Originally posted by @Steven Hamilton II:

I love deferring everything. Why not?
Actually, I may have seen the light since my last post and specially after considering future value of this transaction's tax liability (my first sell you see). My not having liked the deferred tax scenario was a based on the way I conduct day to day business/activities, not because of any significant thought or knowledge on a 1031 exchange. On that note, can you please tell me if tax on this transaction would later be calculated based on today's laws or those in effect when proceeds are finally taken?
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Payman A.
OP
Los Angeles, CA · Member since 2015 · 117 posts · 13 votes
10y
Originally posted by @Mark Creason:

Originally posted by @Payman A.:
I appreciate the reply. I'm using a taxable income example and what you outlined confirms what I was thinking. So even if you are exempt from CG tax because you do not go above the 2nd tax bracket, dep.recapture is always considered ordinary income. Hmmm...might have to consider a 1031 even though I don't like the idea of deferring anything.
Is the property in California? They have a significant tax to collect as well.
Mark
Luckily no and i don't like owning rental property in CA. Selling in NC and replacing in LA and possibly NC
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y
@Payman A."On that note, can you please tell me if tax on this transaction would later be calculated based on today's laws or those in effect when proceeds are finally taken?"

Let's say in 2016 you exchange Property A for Property B. Both properties have identical fair market values. You take the same basis in Property B that you had in Property A. If you sell Property B in 2020, your gain will be based on 2020 tax law, not 2016.
The tax attribute that "carries over" from 2016 is not the tax liability itself but rather the tax basis in the replaced property, which carries over to the replacement property.
Hope this helps.
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Payman A.
OP
Los Angeles, CA · Member since 2015 · 117 posts · 13 votes
10y
Originally posted by @Logan Allec:

@Payman A."On that note, can you please tell me if tax on this transaction would later be calculated based on today's laws or those in effect when proceeds are finally taken?"

Let's say in 2016 you exchange Property A for Property B. Both properties have identical fair market values. You take the same basis in Property B that you had in Property A. If you sell Property B in 2020, your gain will be based on 2020 tax law, not 2016.
The tax attribute that "carries over" from 2016 is not the tax liability itself but rather the tax basis in the replaced property, which carries over to the replacement property.
Hope this helps.
Perfectly explained, thank you!
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