Capital Gain

Forum|Forum|4 months ago
January 14, 2026
2 replies
4 views

My father is 74 years old and lives in California. He is selling his property that he was renting for the last 20 years. He will be selling it for $320,000.00. He will be receiving about 289,000.00 cash. My questions is, will he need to pay taxes on on the amount he is receiving? If so, what would be the estimate he would have to pay? He is retired and hasn't filed taxes in the last 10 years, or longer. Thank you

Not A Product Question

Best answer by Opus 17

@user17684044706 wrote:

He purchased the property in 1993 for $88,000.00. He did paint the house recently (is the only upgrade done) and paid $4,400.00 for that job.

Yes, he must report the gain and pay capital gains tax. His gain is the difference between his cost basis and the selling price, and may have no relationship to the actual amount of cash.

His cost basis what he originally paid, minus depreciation he took or should have taken while he was renting the property. For 20 years and a purchase price of $88,000, he probably took about $59,000 of depreciation, leaving an adjusted cost basis of around $29,000.

His selling price can be reduced by certain selling expenses such as advertising and real estate commission. Let's say for the sake of argument that his total expenses are 10%, so his net selling price is $288,000 (his real expenses might be more or less).

That means his capital gains is (from these example numbers) $288,000-$29,000=$229,000.

The first part of capital gains that came from depreciation is taxed as depreciation recapture, which is taxed as ordinary income with a maximum of 25%. The rest of the capital gains will be taxed by the IRS as a long term capital gains at 0%, 15% or 20%, depending on your father's other income. California will tax the entire gain as regular income.

M-MTax

Level 15

If he bought the property, then we need to know the purchase price plus the cost of any improvements made to determine your father's basis in the property. The gain would be the sales price (less selling expenses) minus his basis.

Assuming the property is improved (i.e., has some sort of structure), part of the gain (if any) would be Section 1250 gain (depreciation recapture over the 20-year period of rental) which would be taxed at ordinary income tax rates (up to a maximum of 25%) while the rest of the gain would be taxed at the long-term capital gains tax rate (up to a maximum o 20%). There is also the NIIT of 3.8% depending upon whether his net investment income exceeds $200,000.

user17684044706Author

Level 2

He purchased the property in 1993 for $88,000.00. He did paint the house recently (is the only upgrade done) and paid $4,400.00 for that job.

M-MTax

Level 15

Painting would be an expense, not an improvement, and. as such, would not be added to his basis.

Mike9241

Level 15

It's unclear, but if he was renting during the last 10 years, even though he didn't file, depreciation was allowed under the tax laws. The tax laws say a taxpayer must use the higher of depreciation taken or allowable in computing gain/loss. How much cash he receives is irrelevant. His gain is Gross sales price less selling costs. less tax basis (cost reduced by depreciation higher of allowed or allowable). For rental real estate, depreciation would be recaptured as a Section 1250 gain, which has a preferential tax rate. Since the property was disposed of he's allowed to deduct suspended losses. However, its possiblle that he had an NOL in some of those 10 years. The fact that no return was filed for 10 years potentially creates issues for which a tax professional would be needed

Mike9241

M-MTax

Level 15

@Mike9241 wrote:
The fact that no return was filed for 10 years potentially creates issues for which a tax professional would be needed

Exactly! There is also a ton of information that has not been provided in the original and subsequent posts, such as the type of property rented, value of the land (if applicable, and this could be vacant land - we don't know).

A tax pro is definitely called for in this instance since a 3115 might need to be filed for any foregone depreciation.