Rental Home Sale, Capital Gains Tax, Married Filing Joinlty?

[Dude3145]

Hello,

My husband and I are selling our rental property we have owned for 28 years. Cost basis at time of purchase was $5,000, (currently $50,000 land value, not total value), plus $45,000 estimated in repairs. We hope to sell it around $200,000. 

I have a question? I am confused as to why, when I google search it states my IRS tax bill would be $0 for married couples filing jointly with total income under $83,000? What does this mean? No tax if we earn under $83K?

Thank you for your help, time and consideration.

[xmasbaby0]

Understand that your income will increase with the sale of that rental property---you do not just count your "normal" income----the money you receive from the sale of that property counts too.  So expect to pay some capital gain tax.

[rjs]

The gain from the sale of your rental property will be long-term capital gain. The tax brackets for long-term capital gain are based on your taxable income, not total income. But the capital gain on the sale is included in your taxable income. Taxable income is total income minus adjustments (if any) and either the standard deduction or itemized deductions.

For 2023, married filing jointly, the tax rate on long term capital gain is 0% for taxable income of $89,250 or less. The $83,000 figure (actually $83,350) was for 2022. For 2024 it's $94,050.

With a basis of $5,000, if you sell the property for $200,000 your gain will be $195,000. Repairs do not increase your basis or reduce your gain. (Improvements are added to your basis, but not repairs.) So the gain on the sale alone will put you well over the $89,250 cutoff for the 0% bracket. Depending on your other income, a large portion of the long-term capital gain on the sale of the property will fall in the 15% bracket.

Also keep in mind that your taxable income will be increased because you have to recapture depreciation that you claimed or could have claimed. The depreciation recapture is ordinary income, not capital gain. But if you only paid $5,000 for the land and building, the depreciation would not be much.

[Mike9241]

I have a question? I am confused as to why, when I google search it states my IRS tax bill would be $0 for married couples filing jointly with total income under $83,000? What does this mean? No tax if we earn under $83K?

that's the number for 2022 for 2023 the number is $89250

this example is somewhat of an oversimplification. 

so if you had taxable income in 2023 of $89250  consisting of $50000  in capital gains and qualified dividends and $39,250 in other ordinary. there would be $0 tax on the $50,000 and you would only pay tax on the $39,250.

However, as income rises that can push some or all of the capital gains into the 15% or 20% bracket

say taxable income is $100,000 with $50,000 in capital gains. now $10,750 of capital gains will be taxed at 15% and more taxes are owed on the $50,000 in ordinary income since other income

in effect that extra $10,750 in income can cost you about $2900 more in federal taxes 

[Opus 17]

Here's how long term capital gains tax works.

Let's assume your other gross income is $60,000 and you claim the standard deduction for married filing jointly of $27,700.  Your taxable income is $32,300.  For 2023, if your taxable income is less than $89,450, your long term capital gains rate is zero.  Above that and your LTCG rate is 15%.  Assuming a capital gain of $195,000, the first $57,150 is taxed at zero% (because $89,450 minus $32,300 = $57,150) and the remaining $137,850 is taxed at 15%.