Though I fall below the amount of my taxable income to have to pay any capital gains taxes will I still be taxed on my gain as ordinary income

[captdennisdugas]

My ordinary taxable income is 25000.00. My gain on a long term capital gains sale of property will be about 20000.00. Though I do not have a capital gains tax will that amount be added to my ordinary taxable income?

[captdennisdugas]

I did not mention that the property was rental that I will show a small profit on. does that change the situation. have held it for 5 years with a profit reported every year.  I reclaimed the depreciation on the sale of this property

[Coleen3]

Yes, the property will be taxed in two separate ways. Both the gains on land and property (apart from depreciation) will receive capital gains treatment and the depreciation will be taxed as ordinary income.

[captdennisdugas]

When I look at my 1040 the capital gains shows on the capital gains line and appears to flow through to ordinary income and all deductions are taken from that which raises my taxable income that amount.  it appears to me that I am paying taxes on the profit of the sale but not a separate tax on just the capital gains. What am I missing?.  I have done a practice 1040 and have reduced the non capital gains income and the capital gains and the both go into ordinary income before the deductions  give the taxable income. Is capital gains tax above the normal taxes if it qualifies.  Sorry but   I am having a hard time getting this straight in my head.

[Coleen3]

The tax is figured on the capital gains worksheet. I'm not sure I understand your question or if this answers it.

https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

[captdennisdugas]

I guess it is a matter of how you say it. "There is no capital gains tax"  This is true. No ADDITIONAL percentage of your capital gains is added to you taxes below certain limits. But, "There is no tax on capital gains." is false. I Have experimented with a practice 1040 with all Taxable income below the threshold and if I put in any amount in the capital gains section it flows right trough to the taxable income amount and is taxed as ordinary income. I have played with this for two days now and the results are always the same.  Any amount that is on line 13 flows to line 22, line 37, line 38 and is reduced by deductions to line 43 Taxable income and always includes the amount from line 13. It looks like I have been operating under the "No capital gains tax" falsehood.  PLEASE PROVE ME WRONG!

[Coleen3]

When I originally worked the problem, I treated it like stock. How much of the $25K is due to depreciation? The profit over and above the depreciation is Section 1231 property and receives capital gain treatment, as does any land. The depreciation is taxed as ordinary income.

[captdennisdugas]

I just ran another practice 1040 and made the only capital gains as a sale of stock with a long term gain of 20000. The same results. The 20k flows right from line 13 to line 38 and ends up on line 43 as part of the taxable income. It appears to me that it is taxed as ordinary income and that "NO CAPITAL GAINS TAX" does not apply. The only other income is 15k as taxable interest(line 8a) and 8.5k on line 20b (Social Security benefits. Line 22 is 42,712. Line 38 is 42,225. Line 40 is 7,850. Line 41 is 34,325. Line 42 is 4,050. Line 43 (taxable income) is 30,325.  Tax is 2,060. When I do not include the 20k the tax is 313.  Also no tax on the Social security. Line 38 is 15k. Line 43 is 3,100. It looks to me like "NO CAPITAL GAINS" means none above what is taxed as ordinary income.  I am using Turbo Tax for all these calculations and assume they are correct. Once again, am I missing something. Thank you Coleen for all your help. I was all excited about NO CAPITAL GAINS below certain limits but I am just not seeing it.

[Coleen3]

It threw me for a few minutes and I finally realized that it is your social security that is being taxed. Take it out and your balance due goes back to $313.

[Coleen3 · Accepted solution]

Your long term capital gains received capital gains treatment and will not be taxed as ordinary income.