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2009USER
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I sold a fully depreciated rental property in 2015 (originally purchased in 1983). TurboTax calculates capital gain tax at >25%??? Instead of 15%...

 
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HelenaC
New Member

I sold a fully depreciated rental property in 2015 (originally purchased in 1983). TurboTax calculates capital gain tax at >25%??? Instead of 15%...

The capital gains is only one part of the equation. You may have 'depreciation recapture' and you may also have been taxed the additional 3.8% Medicate surtax (Obamacare Investment Tax). See the screenshot below.

IRS Publication 544 Chapter 3 Depreciation Recapture   page 29 Section 1250 property defined. This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable. If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property.

The reason you may have to pay a higher income tax rate than the capital gains rate is because of depreciation recapture

  • You depreciated the building and other assets in years past. 
  • You received the benefit of a depreciation deduction that offset ordinary income tax rates (a potential Federal tax savings of up to 39.6%, based on current rates).

  • The government is not going to grant the most favorable capital gains rates on the portion of the gain relating to these prior depreciation deductions.  

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1 Reply
HelenaC
New Member

I sold a fully depreciated rental property in 2015 (originally purchased in 1983). TurboTax calculates capital gain tax at >25%??? Instead of 15%...

The capital gains is only one part of the equation. You may have 'depreciation recapture' and you may also have been taxed the additional 3.8% Medicate surtax (Obamacare Investment Tax). See the screenshot below.

IRS Publication 544 Chapter 3 Depreciation Recapture   page 29 Section 1250 property defined. This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable. If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property.

The reason you may have to pay a higher income tax rate than the capital gains rate is because of depreciation recapture

  • You depreciated the building and other assets in years past. 
  • You received the benefit of a depreciation deduction that offset ordinary income tax rates (a potential Federal tax savings of up to 39.6%, based on current rates).

  • The government is not going to grant the most favorable capital gains rates on the portion of the gain relating to these prior depreciation deductions.  
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