Estimating taxes for depreciation recapture and capital gains on a rental property sale involves calculating the adjusted basis, total gain, and applying appropriate tax rates, but exact amounts depend on specific details like purchase price and depreciation claimed. Depreciation recapture is taxed at your ordinary income rate or 25%, whichever is less, while capital gains are taxed at lower long-term rates if held over a year, with rates varying by income (0%, 15%, 20%).
Estimating Taxes for Depreciation Recapture and Capital Gains
When selling a rental property, estimating what you'll owe for depreciation recapture and capital gains can feel complex, but here's a clear way to approach it. Steps to Estimate your Taxes:
1. Calculate Your Adjusted Basis
- Start with what you paid for the property
- Add any costs like closing fees or improvements
- Subtract the total depreciation you claimed over the years
2. Find Your Total Gain
- Subtract your adjusted basis from the selling price
3. Figure Out Depreciation Recapture
- This is the total depreciation you claimed over the straight-line method of depreciation, taxed as ordinary income at your current rate or 25%, whichever is less, depending on your income.
- That means you won’t have additional depreciation, and no gain will be treated as ordinary income, if you calculated depreciation using the straight-line method (e.g., for nonresidential real property and residential rental property placed in service after 1986).
4. Calculate Capital Gains
- Subtract the recapture amount from your total gain to find capital gains
- If you owed it over a year, it's long-term taxed at 0$, 15%, or 20% based on income. If less than a year, it's short-term, taxed as ordinary income.
5. Total Taxes Owed
- Add taxes from recapture and capital gains
Additional Consideration
- Check your state taxes, which vary, and the Net Investment Income Tax (3.8% on income above $200,000 single/$250,000 married).
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