No, it will not be sold as investment property on your tax return. You converted the property to rental after it was inherited. At that time the depreciable cost basis should have been the value on the date of death. A figure would have been used for land as well. You did all the right steps to sell the rental property and it will end up as capital gain carried first to the Form 4797 and then to Schedule D. You should answer 'No' to 'Special Handling'.
The depreciation recapture will be taxed at 25% and the remaining gain will be taxed at 0%, 15%, or 20% depending on your overall income level. See the information below.
- A capital gain rate of 15% applies if your taxable income is more than $41,675 but less than or equal to $459,750 for single; more than $83,350 but less than or equal to $517,200 for married filing jointly or qualifying surviving spouse; more than $55,800 but less than or equal to $488,500 for head of household or more than $41,675 but less than or equal to $258,600 for married filing separately.
- However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.
There are a few other exceptions where capital gains may be taxed at rates greater than 20%:
- The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
- Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
- The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
You must calculate the building vs land sales price and selling expenses. You can use the city or county tax assessment as a way to know the amount for each.
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