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Understanding Tax Implication of Rental Property sale

Posted: Mon Feb 17, 2020 4:10 pm
by uwbadgers
Hi all,

WILL be selling our rental property this year.....so I'm playing around with my 2019 taxes for a little "test" run of what the tax situation will look like after the sale next year.

I'll try to include helpful information.
Married, file jointly
Combined Income: 192k in 2019

Total tax owed in 2019 pre-"test" of this = $300. For all intents and purposes I'll assume 0 owed as my starting figure for the rental

Rental Property
Purchased: 7/2007 for 189k
Sale Expenses in 2020: 18k (assuming sale at 240k)
Expected Sale Price in 2020: 240k
Rental for: 7 years

Rental Numbers Put into Turbotax for Test
Total Sales Price: 240k
Cost of Property (tax basis) plus expenses of sale: 189k + 18k = 207k
Depreciation taken on property = $6,872 x 7 years = $48,109

For total depreciation I took (what I found on the internet, is this correct???)

189k/27.5 years = $6,872 annually

Then, 7 years rental multiplied by that for the total.
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When I plug that into this year's return I get the following OWED:

Federal: $12,502
State: $3,547
TOTAL: $16,049

THEN, on the next screen I have to select:

"What type of property is this?"
Answer: "One I took depreciation on"

This then jumps the Federal tax up to $16,180

Federal: $16,180
State: $3,547
TOTAL tax owed: $19,727

Ouch.

Does this seem right? Did I input correctly?
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I guess this just seemed very high because the sale price vs. purchase price was only 50k difference, so 50k cap gains?

Then, 18k is lost in sale of property expenses and 19k taxes owed. A total of 37k "lost" on a sale that "net" 50k.

But, then again, first and only rental property being sold.....hence, why I am experimenting now to avoid suprises.

The good news.....the property has been paid for a few years now so funding the tax payment wouldn't be hard, I just don't want to :)
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Appreciate any advice or crushing of how I did this. Maybe I entered things wrong.

Thanks all!

Re: Understanding Tax Implication of Rental Property sale

Posted: Mon Feb 17, 2020 6:56 pm
by oldmotos
You need to look up what you actually took for depreciation on your tax returns. You normally don't depreciate the land value part of the purchase price.

Re: Understanding Tax Implication of Rental Property sale

Posted: Mon Feb 17, 2020 7:02 pm
by CMD1
Your not considering depreciation recapture in your comments. The depreciation recapture can really be impactful when you've owned a rental for a while. Regardless of what tax bracket you are/were in you have to pay 25% of your depreciated amount. So if you assumed the rental less the land at purchase was $170k/27.5 you would have depreciated $6k per year x 7 yrs = $42k x 25% recapture tax = 10.5k in this example + your capital gain tax on the net profit.

Re: Understanding Tax Implication of Rental Property sale

Posted: Tue Feb 18, 2020 4:05 pm
by niceguy7376
uwbadgers wrote: Mon Feb 17, 2020 4:10 pm
Rental Property
Purchased: 7/2007 for 189k
Sale Expenses in 2020: 18k (assuming sale at 240k)
Expected Sale Price in 2020: 240k
Rental for: 7 years

Rental Numbers Put into Turbotax for Test
Total Sales Price: 240k
Cost of Property (tax basis) plus expenses of sale: 189k + 18k = 207k
Depreciation taken on property = $6,872 x 7 years = $48,109
You bought the property in 2007 but only used it as rental since 2012. So you need to find the property value in 2012 when you started it as rental and not the purchase price of 2007.

Have you been taking the depreciation for the last 7 year returns? If you had taken it then (assuming the same tax brackets), then you paid reduced tax for the last 7 years and pay that back now.

Re: Understanding Tax Implication of Rental Property sale

Posted: Tue Feb 18, 2020 4:29 pm
by an_asker
niceguy7376 wrote: Tue Feb 18, 2020 4:05 pm
uwbadgers wrote: Mon Feb 17, 2020 4:10 pm
Rental Property
Purchased: 7/2007 for 189k
Sale Expenses in 2020: 18k (assuming sale at 240k)
Expected Sale Price in 2020: 240k
Rental for: 7 years

Rental Numbers Put into Turbotax for Test
Total Sales Price: 240k
Cost of Property (tax basis) plus expenses of sale: 189k + 18k = 207k
Depreciation taken on property = $6,872 x 7 years = $48,109
You bought the property in 2007 but only used it as rental since 2012. So you need to find the property value in 2012 when you started it as rental and not the purchase price of 2007.

Have you been taking the depreciation for the last 7 year returns? If you had taken it then (assuming the same tax brackets), then you paid reduced tax for the last 7 years and pay that back now.
As far a I am aware ... whether or not OP has taken depreciation, it needs to be paid back upon selling.

Also, my understanding - and this might be flawed as I've not recently visited the topic:

Depreciation will be taxed at 25% flat rate, i.e., $12,027 in this example (assuming the numbers are correct)

The straight up profit will be taxed at capital gains rate(?), I think.

And yes, the cost basis will be the fair market value when it was put up for rent.

Re: Understanding Tax Implication of Rental Property sale

Posted: Tue Feb 18, 2020 5:24 pm
by MarkNYC
an_asker wrote: Tue Feb 18, 2020 4:29 pm
niceguy7376 wrote: Tue Feb 18, 2020 4:05 pm
uwbadgers wrote: Mon Feb 17, 2020 4:10 pm
Rental Property
Purchased: 7/2007 for 189k
Sale Expenses in 2020: 18k (assuming sale at 240k)
Expected Sale Price in 2020: 240k
Rental for: 7 years

Rental Numbers Put into Turbotax for Test
Total Sales Price: 240k
Cost of Property (tax basis) plus expenses of sale: 189k + 18k = 207k
Depreciation taken on property = $6,872 x 7 years = $48,109
You bought the property in 2007 but only used it as rental since 2012. So you need to find the property value in 2012 when you started it as rental and not the purchase price of 2007.

Have you been taking the depreciation for the last 7 year returns? If you had taken it then (assuming the same tax brackets), then you paid reduced tax for the last 7 years and pay that back now.

...And yes, the cost basis will be the fair market value when it was put up for rent.
No, that's not correct. Adjusted basis will be original cost, plus improvements, minus depreciation.

Re: Understanding Tax Implication of Rental Property sale

Posted: Tue Feb 18, 2020 5:29 pm
by mmegu
And, do not forget about that insidious Net Investment Tax of 3.8%. That will come into effect at certain income levels.

Re: Understanding Tax Implication of Rental Property sale

Posted: Wed Feb 19, 2020 7:54 pm
by an_asker
MarkNYC wrote: Tue Feb 18, 2020 5:24 pm
an_asker wrote: Tue Feb 18, 2020 4:29 pm
niceguy7376 wrote: Tue Feb 18, 2020 4:05 pm
uwbadgers wrote: Mon Feb 17, 2020 4:10 pm
Rental Property
Purchased: 7/2007 for 189k
Sale Expenses in 2020: 18k (assuming sale at 240k)
Expected Sale Price in 2020: 240k
Rental for: 7 years

Rental Numbers Put into Turbotax for Test
Total Sales Price: 240k
Cost of Property (tax basis) plus expenses of sale: 189k + 18k = 207k
Depreciation taken on property = $6,872 x 7 years = $48,109
You bought the property in 2007 but only used it as rental since 2012. So you need to find the property value in 2012 when you started it as rental and not the purchase price of 2007.

Have you been taking the depreciation for the last 7 year returns? If you had taken it then (assuming the same tax brackets), then you paid reduced tax for the last 7 years and pay that back now.

...And yes, the cost basis will be the fair market value when it was put up for rent.
No, that's not correct. Adjusted basis will be original cost, plus improvements, minus depreciation.
Hmmm ... I vaguely remember the rental conversion market value being used as the basis. Need to research and find the information... [like I said, my memory is hazy]

And yes, "plus improvements, minus depreciation"...

But hold on, that's not correct either. In that case, depreciation will be double counted!

I'll come back and edit this post ....