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RIVERBIRCH55
Level 1

Sell of rental property was primary residence taxable gains

Hello,

 

 

        I am selling my rental property. I lived there for 1yr 10 months then rented it out for a few years. I have owned the property for a total of about 6 years. I bought it for $290K and selling for roughly $385K. How will my capital gains be taxed?

 

Thank you in advance for the help. 

7 Replies
Carl
Level 15

Sell of rental property was primary residence taxable gains

It appears that you do not qualify for the "2 of last 5" capital gains tax exemption for 2 reasons.

I lived there for 1yr 10 months then rented it out for a few years.

You did not live in the property as your primary residence for at least 2 years (730 days) of the last 5 years (1826 days) that you owned it. So unless you have mitigating circumstances, any realized gain is fully taxable.

 

bought it for $290K and selling for roughly $385K.

So you have roughly a $95K gain on the property.  Add to that the depreciation recapture and that gives you "ROUGHLY" the total you will be taxed on. Add that total to all "other income" to get an idea of what tax bracket you're in.

 

How will my capital gains be taxed?

That's a loaded question, as it depends on all of your other sources of income as well as any tax credits you may or may not qualify for.

Just be aware that your recaptured depreciation will be taxed anywhere from 0% to a maximum of 25%. So even if you end up in a tax bracket higher than 25%, the recaptured depreciation is not taxed at more than 25%. However, with only 5 years of depreciation, I would not expect it to make that much of a difference overall. But still, every little bit helps.

The best thing to do is to create a mock tax return "as if" you sold the property in 2020. That will give you somewhat of an idea.  If you used the online version of TurboTax to complete your 2020 return, then  create an entirely new online account for the mock return. *DO* *NOT* *UNDER* *ANY* *CIRCUMSTANCES* use the same account to create a mock return. If you do, you will permanently overwrite your filed 2020 tax return and will never be able to recover it. That means you will most likely have issues with your 2021 tax return since you would not be able to import the correct information from your 2020 tax return.

 

RIVERBIRCH55
Level 1

Sell of rental property was primary residence taxable gains

Thanks for the great idea of making a mock tax return using a new account. Does any money I put into the place for the resale of it help lower my taxable income? If my taxable gains are $95K and I put $2k into new carpets will my taxable income change to $93K.

 

Thanks in advance.

Carl
Level 15

Sell of rental property was primary residence taxable gains

Does any money I put into the place for the resale of it help lower my taxable income? If my taxable gains are $95K and I put $2k into new carpets will my taxable income change to $93K.

yes.

 

martinmarks
Level 10

Sell of rental property was primary residence taxable gains

Does any money I put into the place for the resale of it help lower my taxable income?

Any money that's used to pay for an improvement.......repairs and fixup expenses don't count.

Carl
Level 15

Sell of rental property was primary residence taxable gains

I'm just restating for clarity, as it kinda threw me for a loop at first there.

Any money that's used to pay for an improvement Do count and do lower your taxable gain.

.......repairs and fixup expenses don't count and do not lower your taxable gain.

 

RIVERBIRCH55
Level 1

Sell of rental property was primary residence taxable gains

Repairs do no help with my taxes, but improvements do. Just so I'm clear new carpets/floors, new counter tops would be an improvement?

 

Thank you

Carl
Level 15

Sell of rental property was primary residence taxable gains

new carpets/floors, new counter tops would be an improvement?

Yes, provided you capitalize them. If the cost is less than $2,500 to have the option to either expense those items, or capitalize them. To reduce capital gains, you'd be better off capitalizing them. Can be done, albeit a bit tricky though, if the improvements are done after the last renter moves out prior to the sale, since the improvements are never actually placed "in service" after the last renter moved out prior to the sale.

 

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