How to determine Capital Gains Rate

4 Replies

To all the BP Tax Experts,

I am thinking of selling my properties and was doing research on capital gains rates. I ran across this article and was wondering about the income threshold. Is my capital gains rate based upon my adjusted gross income of my personal return (LLC flows thru into the personal return), or is it based upon the total wages earned (W2, 1099, other business income, etc.) for the year? Also, the income earned doesn't include the sale of the assets, correct? i.e. my W2 income plus the gain of the assets/buildings does not equal the "maximum taxable income" qualification of the rate chart. It is the total income of W2, 1099, other business income, etc. which determines the maximum taxable income.

I understand the option of 1031 exchanges, but am exploring all options at this point and am wondering what my taxable income is based upon for capital gains rates.

Thanks to all in advance!

@Joe Howell you've asked an easy question with a complex answer.  Here is the Qualified Dividend and Capital Gain Tax Worksheet. It is used to calculate the tax on QD and CG by hand.

Similar to the ordinary tax, the QD/CG rates are progressive. There are 0%, 15% and 20% tax rates and the threshold for each is dependent on your filing status (single, married filing jointly,etc). 

The essentials of the process are to calculate your total taxable income (that's line 43 on form 1040), then back out the part of your taxable income that is due to QD or CG, then figure the tax on that. (You could stop there because you just want to know your CG tax, but for added fun you can finish the sheet to calculate your total tax bill! If you earn enough, don't forget the 3.8% surtax.)

Or you could schlep your files to a tax professional and have them give you estimates. Software rocks.

Best of Luck with your Real Estate Investing!

@Joe Howell

Ask your tax professional to fun the scenarios you are considering as well as any others they may know about. It is worth it to have them do it with actual numbers just as @Paul Allen suggested. Software allows quick trade studio results. 

@Paul Allen and @Carl Fischer Thanks for your advice!  I reached out to my accountant and he saved me from making a HUGE mistake in listing all of my properties.  I owe you guys big time!!!!

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