I am hoping to get help with understanding the potential capital gains and depreciation amounts that must be added to my income upon the sale of a 2 family house that I have owned since 12/17/1993. My wife and I have lived in ½ of the property and rented ½ of the property for the whole time. The total purchase price was $260,000 and sale price will be $1,000,000. There have been no major improvements and the rental unit has been depreciated over the years by $100,000.
Where are these numbers entered on Turbo Tax
Thank you.
half the proceeds, closing costs and half the purchase cost would be entered on the home sales worksheet. this should be no federal income taxes because your net gain will be less than the $500,000 home sale exclusion available when either the husband or wife owned the home for 2 years out of 5 years before sale and both occupied the house as their principal residence for 2 out of 5 years before the sale. the other 1/2 of the proceeds and sales costs get entered on the Schedule E for the rental in the disposition section for the asset. any depreciation taken would be recaptured as section 1250 gain. the gain in excess of this is capital gain. the taxes you'll pay depends in part on your other income in the year of sale. the 1250 gain has a maximum rate of 25% while the pure capital gain would be taxed at a maximum rate of 20%. if you live in a state with income taxes you'll owe state income taxes as well on the rental portion. can't say if you'll owe any state taxes on your residential portion.
That is a different story ... you will sell your personal residence on which you can use the exclusion. Then live in the rental for at least 2 years on which you can again use the personal residence exclusion EXCEPT the depreciation taken in the past must first be recaptured first at a rate no to exceed 25% and then any profit above the recapture can be excluded. Either way the depreciation must be recaptured ... it cannot be avoided.
half the proceeds, closing costs and half the purchase cost would be entered on the home sales worksheet. this should be no federal income taxes because your net gain will be less than the $500,000 home sale exclusion available when either the husband or wife owned the home for 2 years out of 5 years before sale and both occupied the house as their principal residence for 2 out of 5 years before the sale. the other 1/2 of the proceeds and sales costs get entered on the Schedule E for the rental in the disposition section for the asset. any depreciation taken would be recaptured as section 1250 gain. the gain in excess of this is capital gain. the taxes you'll pay depends in part on your other income in the year of sale. the 1250 gain has a maximum rate of 25% while the pure capital gain would be taxed at a maximum rate of 20%. if you live in a state with income taxes you'll owe state income taxes as well on the rental portion. can't say if you'll owe any state taxes on your residential portion.
Mike,
Thank you so much. This is very helpful. I was also told that a law changed effective January 1, 2009 for rental property and that the capital gains might be just the percentage of the years since 2009 - 11yrs divided by the total time I owned it 26yrs or 42% of the gain included for tax purposes. Is this true or applicable to another situation.
Thank you
Rick
There was no such change ... the property should have been fully depreciated by now (if you started renting it in 1993) so your gain on the rental is all recapture of depreciation capped at 25%.
The one sale will be reported in 2 parts ... the rental portion on the Sch E and the personal portion on the Sch D.
Also remember that the land value remained with the personal residence so if you peeled off the $100K from the original $260K then the basis in the personal portion started with $160K and since you will sell for $500K there is no tax on the personal portion however you MUST report the personal sale since you will be issued a 1099-S at the closing of which a portion will be reported on the rental and the rest on the Sch D ... you MUST click this box in the home sale section.
Thank you so much - final question I hope.
If I converted my 2 family to 2 condos and sold the one I'm in and moved to the rental and lived their for at least 2 years and then sold it for $500,000. How might it affect the depreciation and capital gains.
Would I need to pay taxes when I converted it to a condo?
That is a different story ... you will sell your personal residence on which you can use the exclusion. Then live in the rental for at least 2 years on which you can again use the personal residence exclusion EXCEPT the depreciation taken in the past must first be recaptured first at a rate no to exceed 25% and then any profit above the recapture can be excluded. Either way the depreciation must be recaptured ... it cannot be avoided.
So very very helpful. You are saying the depreciation cannot be excluded but it sounds like when I sell the used to be rental which I am now living in after two years, then I will get another full $500,000 exclusion -- is this correct? Whereas as if I sell the 2 family as is, I will have to pay the depreciation plus full capital gains on the rental unit.
Thank you so much
So very very helpful. You are saying the depreciation cannot be excluded but it sounds like when I sell the used to be rental which I am now living in after two years, then I will get another full $500,000 exclusion -- is this correct? Whereas as if I sell the 2 family as is, I will have to pay the depreciation plus full capital gains on the rental unit.
Thank you so much
Correct ...you can use the exclusion every 2 years if you like to move that often ... that is how the new rules were written. My cousin has done this successfully for the last 10 years and pocketed a lot of money in the mean time.
Very Very helpful.
If I convert the 2 family into condos and sell my unit and move into the rental and then sell in two years, how do I calculate the cost basis of the rental when i sell. Is it the original cost of the unit 25 years ago?
Thank you so much
The cost basis is the same as the adjusted depreciable basis you have for depreciation plus cost to sell plus any further improvements you make while you live there. I highly recommend you do some more research and/or get some personal advise from a local tax pro since the state may have some other rules to take into consideration.