How much should i set aside for taxes on money from selling a rental property? I owned the property for 11 years and each year I depreciated it.

[Critter]

Do you use the online or downloaded version ?

[Opus 17]

 I assume this is for a property you sold in 2017 and you want to plan for the upcoming tax season? 

You will owe 25% tax on depreciation recapture, and 15% capital gains tax on the rest of your gain.    This is easiest to explain with an example: 

 Suppose that you purchased the property 11 years ago for $100,000. Since then, you will have taken approximately $40,000 of depreciation.   And then you sell the property this year for $150,000.   Since your cost basis has been reduced to $60,000 by depreciation, you have a $90,000 capital gain. The first $40,000 is depreciation recapture that is taxed at a straight 25%.  The other $50,000 of the gain is taxed as long-term capital gains, which is 15% for most taxpayers. 

So depending on the exact circumstances of your situation, 20% is probably a good guess, as the actual amount will be some combination of 25% and 15% depending on the amount of depreciation, and the final sales price. 

 Be aware that you probably need to make an estimated tax payment to cover the capital gains tax so that you will not get a penalty for underpayment when you file your return. If you sold a home in the last four months of the year, your estimated payment would be due January 15.    When you file your actual tax return, you will include the estimated payment and if you overestimated you will get the difference as a refund. You can make an electronic payment at www.irs.gov/payments. 

[TaxGuyBill]

Also, be aware that that 'extra' income from the sale could affect several other things on your tax return, which could effectively increase your total taxes more than the 25%/15%.  Don't forget State taxes too.

[rushiplet]

Ok that's what I was afraid of, I have other rental properties, could I roll that money into one of them without paying capital gains?

[Critter]

No... it doesn't work that way unless you do a 1031 exchange and get another rental.

[rushiplet]

Opus 17,
Thank you for your example, it is close to my numbers. But I am a little concerned now that I will be paying almost what I made in taxes.
From your example but with my numbers, I bought for 150,000 I rented it for the last 7 years, and I just looked at a few previous year’s schedule E forms and I have been depreciating ~4400 each year for 7 years I rented it = ~40,000. I sold it for 165,000.
If I understand right I have capital gains of 55,000 and the first 40,000 is taxed at 25% = 10,000 and another 15% on the remaining 15,000 = 2,250 for a total of 12,250 that I should set aside for 2017 taxes. (and pay sooner than Jan 15). My heartburn is I sold for 165k and owed 135k and paid about 15k in closing cost and realtor fees leaving me with 15k profit. So, if I need to pay 12k in taxes I will only profit -3k for a 11-year investment… is this right?

[TaxGuyBill]

If it was sold for $165,000 but you had $15,000 of sales expenses, you will be taxed as if it was sold for $150,000.  So the 15% long-term capital gain tax ($2250-ish) would not exist.

You also need to realize that you have been receiving income throughout the past 7 years.  So the profitability of your 11 year investment is not only on the sales prices, but on the 11 years of rental income.

[Opus 17]

Yes, first you can deduct sales expenses from the selling price.  That means real estate commission, and any taxes and legal fees that are commonplace in your market.  (For example, if the seller pays for the building inspection, or the seller pays a transfer tax or deed recording fees.)  So your gain is lower.

Second, your gain is not affected by what you owe.  If you bought for $150K and still owed $135K, then you probably refinanced at some point, which is money you weren't taxed on when you took the loan.  Or maybe you bought with zero down, which means you had money in your pocket all these years to do other interesting things with.

And finally, don't forget your profit over the years.