Capital Gains - Am I Calculating This Correctly?

[Cheyenne0528]

We purchased a house in 2013 and ended up moving for husband's employment. We have rented the house out since 2015 and are now looking to sell the house to the tenants. I am trying to get a ballpark figure of the tax implications for selling the property and capital gains. 

This is how I am calculating it:

Purchase Price = $175,000 (does not include other costs = deposit, etc. Do I figure in those costs?)

Improvements since rental = $6,000

Depreciation (while rental 2015 -2019) = $21,000

Selling Price = $235,000

So the basis would be purchase price + improvements - depreciation = $160,000

I would be taxed on the sales price - basis = $75,000 which would be at 15% based on my tax bracket.

Then the depreciation would be taxed at 25%

Lastly there is the 3.33% of the sales price = $7,825 withheld by the title company for the FTB in California

So from the proceeds I would pay approximately  $11, 250 (capital gains) + $5,250 (depreciation recapture) + $7,825 (FTB) = $24,325

Am I doing it right?

[Carl]

Your rough figures are correct except on two counts.

There is no 15% tax bracket.

Then the depreciation would be taxed anywhere from 0% to a "maximum" of 25%. So if the gain on the sale puts your overall AGI in the 15% tax bracket, that's the highest rate depreciation will be recaptured at.

I also assume you understand how tax brackets work, and realize that your entire taxable income is not taxed at at set percentage rate.

Since you refer to "we" I assume you'll be filing a joint return for 2020. Therefore your income will be taxed as follows for a married couple filing joint.

10%		Up to $19,750
12%		$19,751 to $80,250
22%		$80,251 to $171,050
24%		$171,051 to $326,600
32%		$326,601 to $414,700
35%		$414,701 to $622,050
37%		Over $622,050

So you'll pay $1,975 on your first  $19,750 of taxable income

You'll pay $7,260 on the next $60,499 of taxable income

You can use the chart to get a rough figure of your total tax based on your projected taxable income. Remember, because of the changes to the standard deduction, your first $24,600 of income is not taxed.

[Cheyenne0528]

@Carl 

Wouldn’t that be for short term capital gains?

Since I have owned it for more than a year it would be long term which I understand to be taxed at the rate of 0%, 15% or 20% depending on your taxable income and marital status.

[Hal_Al · Accepted solution]

@Cheyenne0528 

No. It's a two step process.  Technically your basis is $160K.  But for capital gains, your basis is $181K.  235 -181 = $54K is taxed at 15%.  $54,000 x 15% = 8100.  8100 + 5250 = $13,350 Federal (it could be less if you haven't reached the 25% cap).

The  $7,825 (FTB) is only withholding.  It is not your actual CA tax.  You should  get some of that refunded when you file your CA return.  I don't think  CA has capital gains rates, so the whole $75K will be taxed as ordinary income.  Note that this sale means you will have to file a CA return. 

For a more accurate estimate, Try this tool https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1. 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%.  The tool is not capable of applying the 25% cap on recapture.

[TomYoung]

"Lastly there is the 3.33% of the sales price = $7,825 withheld by the title company for the FTB in California.

That's not "the tax" on your gain that's the withholding, a prepayment of income tax.  California generally conforms to federal tax law in this area.  The state of California puts their own tax on all capital gains, and recapture that it’s residents earn.  You can roughly use a 10% rate for estimation purposes.