I have listed my rental home of 6yrs for sale, our situation me and wife are working and the capital gains tax quite doesn't look correct. I was told the capital gain tax doesn't avoid us from actually adding the profit back to our income as other income, so in effect you are taxed twice 1. capital gain 2. profit from sale added to our regualr income..what am i missing here?
isn't rental home treated separately as getting taxed only once as capital gains and my regular income on 1040.
@Rajesh T. There are two elements of taxable income when selling a rental property:
- Capital gain
- Depreciation recapture
Depreciation recapture is the process of "recapturing" prior depreciation taken on the property while it was held as a rental. This is taxed at 25%.
Any gain in excess of depreciation recapture will be taxed at favorable long-term capital gains rates (likely 15%).
You shouldn't be taxed twice on the sale of a rental property.
Normally the sale of an investment property is two fold.
Capital gains tax
Depending on your tax rate - capital gains tax rate is either 0%, 15% or 20%
Depreciation recapture's tax rate is capped at 25%
It is true that selling an investment property with a large gain can ultimately push your other income to a higher tax bracket. Sometimes its good to do some planning and sell in years that you may have less overall income compared to other years.
You also should not forget about paying NJ Income tax as well.