If you sell a house do you need to file a return for the capital gain or do it when I file taxes next year

[pinkjelly1234]

"Then on top of that, you will still probably pay some tax on the depreciation.  When you rented the house you were entitled to take depreciation, and when you sell you have to pay that back (pay a recapture tax) if you sell the house for more than the depreciated value.  "

-)What is a depreciated value?
-) even if I already reported all taxable rental income every year (for 3 years), when sold a house, I have to pay for depreciated tax ( is it same as a recapture tax?)

Sorry,..too many questions,.,,

[pinkjelly1234]

Are you a tax accountant? How I can't say thank you enough!!

"Let's say the purchase price was 200,000.  Three years of depreciation is roughly 20,000.  So your depreciated basis is 180,000.  Then let's say you sell for $400,000.  When you subtract your remodel costs, your sales expenses, and your depreciated basis, you would have a gain of $146,000.  The first $20,000 is recaptured depreciation and will be taxed at 25%, regardless of how long you lived there.  The remaining $126,000 is long term capital gain and is usually taxed at 15%, or would be tax-free if you sell after May 2016."


-) if applying to my case...

Purchased $249,900
Depreciation (10% ?) $24,990
*Deprecation basis $22,4910
Sold home $450,000 (supposed)
*Agent fee 6% $27,000
*Remodeling expense $50,000
* First $24,990 is recaptured so it's 25% regardless of residency -) $6,247.50
Then remaining gain is $141,842.50

Depends on 2 years minimum residency with 2 years minimum ownership,
$141,842.50 can be tax free or taxable 15% ($21,276)

Is my calculating correct? Doesn't have to be accurate , I just would like to see how much I need to be ready to pay tax or not..

Hope my calculation is  right.

Before getting your professional help, I just thought if I don't quality , my gain tax would be over $50,000...now I see it can be $21000 less or more or not.

Tomorrow is thanksgiving.
God bless you and your family.
I'm so astonished and joyful to know how it goes!

[Opus 17]

OK, @pinkjelly1234
Part 1 on depreciation.
Depreciation is a deduction you can take for the "used up" value of a capital asset (usually, tangible property with an expected life more than one year).  Let's start with a baker who buys an oven for $5000.  That's not deductible all at once, but since the oven loses value over time as it becomes used.  That's depreciation.  In this case, the baker can take a depreciation expense over 5 years, or $1000 per year.

Now, you also need to know about cost basis.  The cost basis of an item is the amount of already-taxed money you spend to acquire it.  The cost basis of the oven is $5000 because the baker used after tax money to buy it.  But each year that he takes a $1000 depreciation deduction, he is reducing his cost basis because some of the purchase was now made with tax-free money.  

Whenever you sell something for more than your basis, you owe gains tax.  If you buy a baseball card for $1 and sell it for $100, you pay tax on $99 because you already paid tax on $1.  For the baker, since he has been taking tax deductions for depreciation, he has to pay tax if he sells the oven for more than his basis at the time of the sale.   In year 4, the baker has deducted $4000 of depreciation, and the cost basis of the oven is $1000. If he sells it to a competitor for $1500, he owes tax on the $500, that is "recaptured depreciation."

With a house, land doesn't get used up, but the structure does.  Let's say that for your house purchased for 249K, that 49K was the value of the land and the house was 200K.  (You may not know the exact number but your tax accountant should, or you need a new tax accountant.)  Houses depreciate over 27-1/2 years.  So for each year that you rented it, you can deduct $7272 as a depreciation expense.  You pay tax on your net rental income, so if you rented it for $2000 per month, you take the gross income, subtract expenses like insurance, taxes and maintenance and the property manager fee, also deduct depreciation, then pay tax on the net income.  The depreciation reduces your taxable rental income.  Since it's like taking tax-free money out of the house, it reduces your cost basis.  After three years of rental, your cost basis is $249,000 minus (3 x $7272) = $227,184.  If you sell for more than the cost basis, you have to pay tax on the gain that is due to depreciation.  So whatever happens to the rest of the gains, the first $21,816 is depreciation recapture taxed at 25%.

This has to be paid if you were entitled to deduct depreciation, even if you did not actually deduct it.  If your tax accountant did not deduct depreciation, you may need a new accountant (who can also fix the error and get you some of the benefit of the depreciation if you missed it before).  Taking depreciation on rental property is always going to be a deduction when you rent that has to be paid back when you sell, but that's the way it works.

Hope the helps.  Part 2 on what happens to the rest of the gain is coming soon.

[Opus 17]

@pinkjelly1234
Part 2 on capital gains exclusion.
To qualify for the exclusion, you have to own the home at least 2 years, live in it as your main home at least 2 of the past 5 years, and not have used the exclusion within 2 years on a different house.  The two years lived there do not have to be consecutive, so its really 24 months of 60 months.   Your gain calculation is basically correct,

Purchased $249,900
Depreciation $21,816
Remodeling expense $50,000
=Adjusted cost basis of $278,084.
Selling price $450,000
Sales expenses $27,000
=Amount realized from sale $423,000
Gains = $144,916
First $21,816 is depreciation recapture taxed at 25%
Remaining $123,100 treated as described further below.

If you sell (closing date) before May 2016, you won't have 24 months of living there as your main home, and the $123,100 will be taxed as long term capital gains (15% for most people but with some exceptions).

If you close after having lived there 24 months of the 60 months just before the close, you can exclude SOME of the gains from tax.  But now unfortunately, you are running into an IRS brick wall called "non-qualified use."  The IRS or maybe Congress decided at some point that the 250,000 exclusion was a generous benefit intended for homeowners but not landlords, and they did not want landlords excluding their gain from long ownership by moving into the property for 2 years before selling.  So they created some very complicated rules.  The whole point is that you can only exclude the gain that came from the time you lived in the home, not the gain that came from the time you rented it out.  IRS publication 523 describes them, but actually the 2013 version is much easier to understand than the 2014 version, see links below.  Basically, the time that you rented the house is "non-qualified" for the tax break.  If you close in May 2016, then you have 24 qualifying months and 60 months of ownership, so only 24/60 (40%) of the gain is excluded, and you pay tax on the rest.  If you close in July then you will have 26 months of qualifying use and 62 months of total ownership so 41.9% of the gain is excluded.

So if you close in July, the first $21,816 is taxed at 25%,
then $123,100 x 0.419 = $51,579 is tax-free, and the remaining $71,521 is taxed at 15% long term cap gain.  Your total tax bill might be $16,182.

Note that there are probably more closing expenses that you can deduct from your sales price, like any surveys and inspections you pay for, and there are a number of closing costs from the original purchase that you can add to your cost basis, like recording fees, inspections, your attorney, title insurance, and so on, and those will all reduce your taxable gain, so it will pay to document them all.  It's described in publication 523.  Also note that when you calculate your percentage of non-qualifying gain, you actually count days rather than months, so it will be something like 5535 days of ownership against 782 days of qualifying use (residency).

If you pay an accountant they should do all this for you. Good luck.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/p523--2013.pdf">https://www.irs.gov/pub/irs-prior/p523--2013.pdf</...>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-prior/p523.pdf">https://www.irs.gov/pub/irs-prior/p523.pdf</a> (2014 version)

[Opus 17]

I corrected a small typo: sales expenses reduce your amount realized, and closing costs when you bought the house *increase* your cost basis.  These expenses work together to reduce your gain, so take the time to document them.

[TaxGuyBill]

@Opus 17 :  You beat me to it.   🙂    I just posted a similar (but not nearly as detailed) answer for pinkjelly on another post.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2923423-question-about-california-capital-gain-tax-on-home-selling...>

[Opus 17]

I didn't realize the same taxpayer had two conversations going.

[TaxGuyBill]

I think there is a third one somewhere that Hal_Al has been answering.

[pinkjelly1234]

God bless all for you guys! I'm printing these answers to study myself for better figure!
I will also review all links you guys provide me..
Tax figure is never easy...you are so genius! How can it be all understood?

[pinkjelly1234]

Thank you  so much....I think I got to sell sooner....so I may pay for capital gain tax....
I am not sure did I MENTION about rental income??

Anyone...please review my case for help......

My house is on the market and someone is interested...

How much would capital gain tax be?? Approx??  Please help me......

My escrow says 4/26/2011 closing
Local record for purchase says 5/26/2011 (Is this one actual purchase date?)
Lived there until Oct 2012 (Owner occupied)
Rented out Nov 2012 until Nov 30th 2015 (Rented out)
Moved in Dec 5th 2015 to current (Owner occupied)
Estimated sales price: $450,000
Loan amount: $125.000
Home improvement and repair: $60,000
Rental income/loss: * This is paid over personal income, should I add it when sold home???
Home ownership fee: $255 monthly

[TaxGuyBill]

It will be MUCH easier and more accurate if you download the program and enter the information into TurboTax.

[pinkjelly1234]

How do I do that??

[TaxGuyBill]

You can start the online version for free, and pay for it when you print or file your tax return.  However, I recommend the CD/downloaded version.  You need to pay for it upfront and it costs more, but it is better.  I THINK that the "Deluxe" version will work fine.

<a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/personal-taxes/cd-download/">https://turbotax.intuit.com/personal-taxes/...>
<a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/personal-taxes/online/">https://turbotax.intuit.com/personal-taxes/onlin...>

[Opus 17]

With rental expenses the customer might be happier with the CD/download Premier version.  Deluxe contains all the forms needed, but Premier has a more detailed interview process for rental income.  If using Turbotax online, Deluxe does not have the rental forms at all and they must use Premier.

[Carl]

Hopefully I'm not repeating something above, but I didn't see this mentioned. If the house was a rental at any time during your ownership, or if it was used for business of any type, such as claiming home office expense for a business you owned, or a home office for work related W-2 income you received, then you need to report the sale on your tax return regardless. This is because you will have depreciation that must be recaptured. You will pay tax on the recaptured depreciation no matter what, as depreciation has nothing to do with any exclusions you may qualify for. Even if you didn't take depreciation, you will still pay taxes on the depreciation you *could* have taken.