Real Estate Income & Taxes

5 Replies

If I have multiple investment properties and over the course of my time owning properties I realize that if I choose to re-sell the properties any profit I would make on the properties they would be subject to capital gains tax, assuming they are not my primary residence which they are not. So my question, do you pay capital gains on each property you make a profit on during a sale of your home, and if you do, are you paying capital gains tax AND income tax on the profit or just capital gains tax. Also if I have 3 properties and each property I sell, let’s say I make $190,000, the rule states that if you make less than $250,000 in profit you get to keep all of it without being taxed with capital gains. Does this still apply? Or since they are investment properties it doesn’t? Thank you in advance. Any advice/opinion is valued.

Arthur Voskanyan

Just cap gains, And tax on depreciation you claimed while owning them at ordinary tax rates (25% max cap).
The two year (perhaps soon to be 5) thingy is only for your primary residence.

@Arthur Voskanyan

Hi Arthur - I think it easier to think of it this way

You are paying Income tax on the difference between the selling price and the adjusted basis of the investment property you are selling. However, the income tax you will be paying is capped at the Capital gains rate and/or the depreciation recapture rate.

At the federal level the capital gains rate is 0%, 15% or 20% depending on your income tax bracket

The depreciation recapture rate is 25%

the $250,000 exclusion applies to your personal residence.

Also, you will pay ordinary income on the state level, so in California you could pay up to an additional 13.3% in state tax. 

Todd, so on top of the capital gains tax, what are you referring to when you say, ordinary income tax? Are you saying that any profit I make on a sale of a investment property, I will pay capital gains as well as income tax on the property?

@Arthur Voskanyan , You pay all applicable federal and state taxes.  If you've owned the property for more than a year your federal tax is as a recognized capital gain plus the depreciation recapture.  

Each state is going to be unique.  Some states don't have state tax. Some states don't have a capital gain rate as such.  They have a tax on income.  So the same gain you pay federal capital gains tax on you would pay state income tax on.  So just to complete the rubbing of salt that @Todd Dexheimer started, if you're AGI is south of $400K you'd be paying 15% capital gain fed, 13.3% state income tax CA, and maybe 3.8% ACA surcharge.  Or 32.1% tax total on your profit.  

That's a pretty steep price to pay to liquidate.

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