Long Term Capital Gain on a Rental Property

[TSophy]

Hi, quick question:

I live in Oklahoma and bought my first house in 2005, lived there until 2011 and turned it into a rent-house after my wife and I married and bought another home.  So, it's been a rent-house for ten years and I'm selling it this year 2021 (it's only in my name) and I estimate a $30k - $35k capital gain on the sale.

My wife and I have always filed married jointly, however I'm retired and only receive investment income of approximately $36k annually, she works full time and earns approximately $100k annually, we've taken the standard deduction for the last 3 years. 

My question is would filing married separately for 2021 make sense regarding the long term capital gain on the rental property? 

If we file jointly I assume there would be a 15% cap gain tax however by filing separately wouldn't the cap gain tax be 0%?   

Thank you so much for any info regarding this matter.  Sincerely, Trey Sophy 

[TSophy]

I live in Oklahoma and bought my first house in 2005, lived there until 2011 and turned it into a rent-house after my wife and I married and bought another home.  So, it's been a rent-house for ten years and I'm selling it this year 2021 (it's only in my name) and I estimate a $30k - $35k capital gain on the sale.

My wife and I have always filed married jointly, however I'm retired and only receive investment income of approximately $36k annually, she works full time and earns approximately $100k annually, we've taken the standard deduction for the last 3 years. 

My question is would filing married separately for 2021 make sense regarding the long term capital gain on the rental property? 

If we file jointly I assume there would be a 15% cap gain tax however by filing separately wouldn't the cap gain tax be 0%?   

Thank you so much for any info regarding this matter.  Sincerely, Trey Sophy 

[Carl]

would filing married separately for 2021 make sense regarding the long term capital gain on the rental property? 

Probably not. When a married couple files separately a number of things happen.

- You both automatically lose a number of deductions you may otherwise qualify for if you filed joint. This includes the EIC, dependent care credit and education credits to mention a few.

- Your SALT limits (State and Local Taxes) are cut in half for both of you.

- If one of you itemizes deductions then you must both itemize - even if the itemized deductions of one of you is zero. Likewise if one takes the standard deduction then you must both take the standard deductions - even if the itemized deductions of one of you would be higher.

-Filing separate has the potential to make more of the gain on the rental property sale, taxable at a higher tax rate, as the tax brackets are cut in half for each of you when you file separate.

[Hal_Al]

The only way to be sure is prepare returns both ways and compare.

Try this tool https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1. 
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 Taxcaster tool is not capable of applying the 25% cap, but that shouldn't be a problem in your case)

[TSophy]

Very good, thank you!

[Hal_Al]

If you have the desktop/download version of TT, you can set up test returns, in the program. 

[TSophy]

Excellent, I'll start playing around with it.  Thanks again.