Exactly Home Much Will I Owe the IRS After I Sell Rental Property I Bought for $419 and Will Sell For $600K

[cocojo3]

I purchased a home as a rental property ten years ago for $419.  I have put $40K of improvements into the home.  It has been a rental the except for 18 months 6 years ago when I lived there.  I am NOT moving back for two years.

How much will I owe the IRS next year.  The calculations are so difficult for someone who is not math-centric to figure out.  I will consult my tax preparer, but I want to get a general idea, before I put it on the market for sale.

Thank-you.

[Lisa995]

Several different things will come into play in this situation.  Not just the gain on the sale, but the recapture of depreciation as well.  Consulting your tax preparer first would be your best bet.    Many times selling a rental creates a much larger tax burden than people anticipate.

[Hal_Al]

600-419-40= $141K capital gain.  Then you have to treat the depreciation you claimed (or should have claimed) as additional capital gain.  The depreciation recapture is taxed at ordinary income rates (not the more favorable capital gains rate ). 

Try this tool https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1. Enter your regular income first to see the regular tax. Then add the sale to see the effect.
Enter the difference between the $141,000 as a long term capital gain (LTCG). Enter the depreciation you've taken over the years (depreciation "recapture") as other income. Depending on how much total income you have LTCG are partially taxed at 0%, 15%, 20% and/or 23.8%. Depreciation recapture is taxed at your marginal rate, but not more than 25%.

For a detailed write up on this complicated topic see https://ttlc.intuit.com/questions/2593356-sale-of-rental-property-in-2014. You may want to use professional tax help when the time comes, although TurboTax can handle it

[kriskelly49]

I have a follow-on question - if you lived in a primary residence for 6 years and then converted it to a rental property, if the market value at the time of conversion was less than the purchase price, wouldn't the basis in the property decrease to the market value at conversion?   

[TomYoung]

If you convert a personal residence to a rental then the value for purposes of the depreciation calculation is the lower of cost or market at the time of conversion.

[pgbstacks]

Check out this calculator for depreciation recapture and overall capital gains. Won't be as useful if you have excess depreciation recapture as that's taxed at a higher rate. Either way, consult an accountant!

[Carl]

if you lived in a primary residence for 6 years and then converted it to a rental property, if the market value at the time of conversion was less than the purchase price, wouldn't the basis in the property decrease to the market value at conversion?

Not in your case, no, because you sold at a gain. You will use the "higher" of your purchase price plus what you paid for property improvements, or FMV at time of conversion as your cost basis on the sale. This decreases your taxable gain.

If you sold at a loss, then you would use the "lesser" of what you paid for it plus the cost of improvements, or FMV at time of conversion. This decreases your losses.

In the past, it was unheard of for rental property to have an FMV lower than the purchase price at time of conversion. But with the 2008 housing market crash, it can happen now. So since you sold at a gain, if the land value plus the structure value used for depreciation is less than what you paid for it, you can't report your sale in the Rental & Royalty Income (SCH E) section of the program. You have to report the sale in the "Sale of Business Property" section. It's a bit tricky to get the numbers right. But it's perfectly doable with TurboTax. Just holler my way if you need help with it. If you don't do things "just right" the program will refuse to let you e-file.

Keep in mind also that you can't do squat with this right now, because the depreciation section of the program is not yet complete.