Hello,
Can someone take the time and explain, step by step (with an example) of what happens when you sell a rental property. I understand the Cost Basis, and Adjusted Cost Basis a little bit, but trying to figure out how you figure what you are going to pay in taxes after all is said and done, ie, ordinary tax, capital gains tax, dep. recapture, etc. Using hypothetical numbers such as 150,000 bought, 30,000 in depreciation, selling for 200,000.
Thanks in advance!
In a nutshell, when you sell a rental property for a profit, your capital gain (profit) has two components.
[]The profit due to appreciation, and, []The profit due to unrecaptured depreciation.
Using your numbers and assuming that your capital gains tax rate will be 15%, then your profit from appreciation is $50K and your profit from unrecaptured depreciation is $30K. Depreciation is recaptured at 25%, regardless of your income tax bracket.
Your capital gains tax liabilty on the sale is calculated as follows
[]$50K x 15% = $7500[]$30K x 25% = $7500
Adding the two, your total tax on the sale of your hypothetical rental property comes to $15K.
Dave,
Thanks, between your answer and going over the IRS publication 523, looks like I got it pretty much figured out. Once you figure out all your costs and additions to figure out you adjusted basis, seems easy enough to figure out your gain or loss, it’s just the IRS seems to explain things harder than they need to be, but their examples help also.
Thanks a bunch for helping me understand this enigma.