Capital Gains on Sale of a Rental

6 Replies

My parents bought a house 10 years ago before the bubble.  They bought it for $180k.  They rented it for 10 years.  Now they sold it for $195k.  What is the capital gains?

Sam,

To determine that first you need to see what is the basis of the property? were your parents taking depreciation deduction (reduce basis) or any major improvements(increase basis). Gain/Loss is calculated based on Selling Price - Basis.

So sale price minus basis and then the gains tax is 15% of that difference?

How does the cost of finally repairs prior to the sale factor in?  What about agent commissions paid on the sale? @Jay Patadia

Sales commission paid to realtor to will be added to the basis. If repairs doesn't improve the quality or increase the life of asset will be treated as operating expenses of the property. Installing new roof or HVAC system will increase basis. Merely re-painting wall or fixing door knobs are operating expenses and do no increase basis. Consult your accountant to know the specifics of repair vs improvements expenses.

They may have no actual cap gain, with the small spread and any improvements they made. Their biggest tax will be for depreciation recapture....due whether they actually claimed it or not. At 180k purchase price, yearly depreciation would be around $5500 or so.....for ten years that means they will owe income tax, up to 25%, on $55,000 or so.

@Sam Marcos

I agree with @Wayne Brooks that your parents may not have much capital gain due to appreciation at all.  Assuming there have been no capital improvements in the last ten years to adjustthe basis, then their capital gain due to appreciation is $15K.  After adjustment for a 6% sales commission, the capital gain is about $3K.  If your parents have $3K in capital losses in the stock market to offset this gain, there will not be any capital gain to tax.

Given that your parents' purchasse price was $180K, and assuming that 25% of the purchase price is allocated to the land, the depreciation basis for the dwelling structure becomes $135K, with an annual depreciation allowance of about $4910.  If they pay the maximum tax on the unrecaptured depreciation, the tax bill will come to about $12300 in this example.  

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