Calculating capital gains

[LandLady]

My husband purchased a condo is 2008 for $98,000 right before the housing market crash. Property values dropped overnight to $30,000-$40,000. We lived in the unit till 2013, and when we bought a house, we opted to rent out our unit to pay down what we still owed on our mortgage. The housing market has come up and we could sell for about $75,000, and we have paid down some, but we still owe $75,000. We don't live close to our rental property and we aren't  making any profit, just breaking even, so we are ready to be done with the place. We know we can sell for what we owe, but we likely won't get much more than that. We are worried about capital gains tax, because we can't afford to take a huge loss at tax time. 

If we sell for less than we paid initially, do we owe capital gains?

Most brackets say that if you make more than $76,000 in income tax, you pay 15%. We make more than $76,000, but we will not be making any money on the rental property, will we still have to pay a capital gains tax?

Can we deduct what we still owe for our mortgage from our capital gains?

My husband thinks that we will have to pay about $10,000 in capital gains tax, but if that is the case, we will be stuck with this property for another decade or more. Please advise us as to how we can sell the property this year, and break even.

Other than capital gains tax, what other fees or taxes are typically associated with selling a rental property?

[NCperson]

the answer is going to be dependent on how much you have depreciated the condo on your taxes over time. 

more likely, you have a loss, not a gain so it could save you taxes... but without additional numbers it's hard to pin it down. 

the mortgage has nothing to do with the calculation... 

the profit / loss is based on a) what you paid for the property (add in the closing costs from the purchase), b) what you sold the property for (less the costing costs from the sale) and adjusted for the depreciation since the beginning. 

I am sure others with respond with more specifics.  

[AmeliesUncle]

Just some ESTIMATED numbers:

Most likely you will not have ANY gain or loss on the tax return.  I crunched some numbers using both $40,000 and $60,000 as the Fair Market Value in 2013, then renting it for 7 years.  Both resulted in no gain or loss, so it would not affect the amount of tax on your tax return.

However, TurboTax is NOT set up for this scenario, so you would probably want to go to a tax professional this year.

[AmyC · Accepted solution]

The question is not if you sell for less than you paid; but, is your basis greater than the sales price.  Depreciation is always the biggest concern. You have been renting the property, claiming depreciation each year. You also claimed expenses while renting the property on your tax returns.

Your basis in the property is what you paid for it plus improvements you made that were not claimed MINUS all the depreciation you have taken plus expense of sale, commissions, etc.

For example: $98,000 purchase +0 improvements + $5000 sales expenses minus $15,000 depreciation = $88,000 basis.

Take your newly calculated basis and compare it to the sales amount to determine your capital gain.

Pretend you sell for $75,000 and you have a loss on the property. If you have a loss, you will not have capital gains.

I don't believe you will have capital gains regardless of your income level based on your scenario. You need to do the math with the real numbers.

The IRS is not concerned with mortgages. You can not deduct what you owe from your sales price, capital gains, anything.

The only other tax you may incur is state tax where you own the property. Each state has different rules. Here is a link to all states.

[Critter]

You made no mention of depreciation being taken ... if you FAILED to take the required depreciation then RUN to a local tax pro to get this return done as you will need a form 3115 to correct this error ... it is not a form in the TT program and is definitely NOT a DIY form. 

[LandLady]

Thank you all for clearing that up for me. 

[jose66hou]

is required to calculate o enter depression for a rental property?

[Critter]

YES ... the IRS requires you to take depreciation ... if you fail to do so you would still be required to recapture the depreciation as ordinary income even if you never took the depreciation ... so not taking it only hurts yourself and the IRS gets to tax you twice. 

[Carl]

the IRS gets to tax you twice.

Exactly! That's your "penalty" for not having taken depreciation in the first place, when you were required to.

For the sale your cost basis is "NOT" what you paid for the property originally. Your cost basis is:

What you paid for the property originally

PLUS

What you paid for property improvements

 MINUS

All depreciation taken on the property. If depreciation was not taken as required by law, then you still have to subtract the depreciation you "should" have taken.

The result is the cost basis you're required to use for determining any gain or loss on the sale.

If you did "NOT" take depreciation on the property as required by federal law, then no matter what, you need professional help to report this sale. (You'll already been informed by the 3115 which is not simple.)

If the property was sold for "LESS" than the FMV when the property was placed in service, then you can use TurboTax to report the sale in the Rental & Royalty Income (SCH E) section of the program.

If the property was sold for "MORE" than what you paid for it, then you can use TurboTax to report the sale in the "Sale of Business" section.

If you sold the property for a price between what you paid for it originally, and the FMV used for depreciation when you placed it in service, then you can "NOT" use TurboTax at all to report this sale. You will need to seek professional help. The TurboTax program can not "correctly" handle this specific situation.

[goldfinger09]

Does anyone know if you have foreign currency that you brought 10ys ago for thousand and then that country revalued there currency and now your foreign currency is worth millions, this is all hypothetical of course, what capital gains category with the IRS would this fall under and what percentage would they be looking for?

[ReneeM7122]

Foreign currency that was purchased 10 years ago and revalued would be taxed as ordinary income.  

There are seven tax brackets for most ordinary income: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.   The percentage you use depends upon your income.  As you move up the pay scale, you also move up the tax scale, since the U.S. has a progressive tax system.

Here is a TurboTax article about tax brackets.

@goldfinger09

[goldfinger09]

So if I understand this right, if someone was to all of sudden come into a large sum of money, like winning a lottery or having a large sum of a foreign currency that revalued creating a large windfall, the IRS would base there percentage of capital gains on the current yearly income your making at the time? like if your making say twenty five thousand a year would be X% and if your making five hundred thousand a year would be much higher percentage, not just one capital gain percent based on the type and amount of the windfall?

[MaryK4]

That is correct- your capital gain rate is determined in part by your income for that year.

See Topic No. 409 Capital Gains and Losses under the Capital Gain Tax Rates for a great explanation.

@goldfinger09

[vizchristine]

Does the mortgage go into calculating one's basis? 

[FangxiaL]

No. The mortgage is not added to the basis of your property,  nor it is subtracted from the sales price.

The cost basis of your property is generally the price you paid for it. If you made home improvements on your property, it can also increase the cost basis, if the improvement adds materially to the value of your home or prolong your home's useful life significantly. 

@vizchristine