LT Capital Gains owed on Sale of Rental Home owned 40 years

[Money-Veeda]

I have a question about a rental home sold in 2017.

We are exploring options to avoid paying

~$40,000 in long term capital gains.

The home was bought in 1976 for $80,000

It was sold in 2017 for $305,000.

It was depreciated annually all the way down to zero.

So the LT Cap Gains is based on $305,000 correct?

Purchased an apartment building in Wisconsin in early 2017.

Will the $50,000 in losses from the apartment building offset the $40,000 in capital gains owed?

For 2017 Apartment Building

The mortgage interest payments + points paid etc. = $90,000 

The costs from repairs, utilities and misc. = $60,000

The total expenses for 2017 will be ~ $150,000

The total income is ~$100,000

Losses ~ $50,000

Will the $50,000 loss from the apartment building offset the $40,000 in LT capital gains?

Otherwise total income was only $16,000 from SSI & the rental home that was sold.

As long as the AGI stays below $38,000 (for a single filer) there are no LT Cap Gains owed...correct?

Thank you!

[TaxGuyBill]

A few other thoughts:

For the rental house that you sold, did you factor in the gain from the depreciation?  If not, your Gain would be larger than that, and the tax on the depreciation is taxed at your regular tax rate (up to 25%).

You said "we" are exploring options.  Is this your personal tax return, and you are filing as Married Filing Jointly?

Do your expenses for the apartment include depreciation?

If you "actively participate" in the apartment rental, you are limited to using $25,000 of losses per year (if your income was over $100,000, it would be less than that or nothing).  The rest of the loss will carryover to next year.

[Money-Veeda]

Thank you!

[ValerieE · Accepted solution]

No.  Since this is a long term capital gain it will receive preferred tax treatment.  The loss from the rental will offset the other income but not the long term capital gain.  

This really isn't bad news though!  Your total income including the rental loss, other income and capital gain will be used to determine your tax bracket.  If you are in the lowest two tax brackets, which seems likely from the information you have given, your long term capital gains tax rate is 0%.  This means that even though your rental loss is not directly offsetting your capital gains it is helping you get into a lower tax bracket where you are not taxed on long term capital gains.  

If you are not in the lowest two tax brackets the long term capital gains rate is either 15% or 20%.  

[Money-Veeda]

Thank you!