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Determining capitol gains tax rate for rental property

I purchased a small investment property in 2004 The property has always been a rental and I never lived in it. If I sell it today the gain would be about 200k (including 13 years of depreciation). Otherwise, my taxable income is very low and I fall into the 10% income tax bracket, which I read does not get taxed on capitol gains. Is this true in my case? Can I simply sell it and walk away with the windfall tax free?

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Level 12

Determining capitol gains tax rate for rental property

"Can I simply sell it and walk away with the windfall tax free?"

No.  At the very least you'll have to recognize the depreciation recapture, taxed at ordinary tax rates.  But the mechanics of the calculation of capital gains doesn't mean "I'm in the 10% tax bracket - ignoring my LTCG - so all my LTCG is tax-free."  As long as all your "other" income plus LTCG keeps you in the lowest two tax brackets your LTCG will be taxed at 0%.  But as soon as the sum of other income plus LTCG breaks through the upper limit of the 15% tax bracket, the excess will begin to be taxed at a 15% rate.

Of course the rates cited here are the "statutory" rates, not the "real" rates that you might be assessed with you actually enter the sale.  Our tax code is so larded up with numerous phase-outs, phase-ins, surtaxes and hidden marginal rates that the actual increase in income taxes with the entry of the sale could be much higher.

Tom Young



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Level 12

Determining capitol gains tax rate for rental property

"Can I simply sell it and walk away with the windfall tax free?"

No.  At the very least you'll have to recognize the depreciation recapture, taxed at ordinary tax rates.  But the mechanics of the calculation of capital gains doesn't mean "I'm in the 10% tax bracket - ignoring my LTCG - so all my LTCG is tax-free."  As long as all your "other" income plus LTCG keeps you in the lowest two tax brackets your LTCG will be taxed at 0%.  But as soon as the sum of other income plus LTCG breaks through the upper limit of the 15% tax bracket, the excess will begin to be taxed at a 15% rate.

Of course the rates cited here are the "statutory" rates, not the "real" rates that you might be assessed with you actually enter the sale.  Our tax code is so larded up with numerous phase-outs, phase-ins, surtaxes and hidden marginal rates that the actual increase in income taxes with the entry of the sale could be much higher.

Tom Young



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Level 15

Determining capitol gains tax rate for rental property

Try this tool <a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1">https://turbotax.intuit.com/tax-to...>. Enter your regular income first to see the regular tax. Then add the sale to see the effect.
Enter the difference between the sale price and what you paid for it originally as a long term capital gain (LTCG). Enter the depreciation you've taken over the years (depreciation "recapture") as other income. Depending on how much total income you have LTCG are partially taxed at 0%, 15%, 20% and/or 23.8%. Depreciation recapture is taxed at your marginal rate, but not more than 25%.

For a detailed write up on this complicated topic see <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2593356-sale-of-rental-property-in-2014">https://ttlc.intuit.com/q...>. You may want to use professional tax help when the time comes, although TurboTax can handle it
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