how does cap gains tax work for rental properties?
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Anonymous
| folks, i have a sibling who owns a couple of houses in NoVa as rentals. each worth about 1.5m. if she decides to sell these, what is her capital gain tax burden? she was asking me but i had no idea. yes, she will reach out to her CPA (eventually). owned more a few years (like 10?), and for the sake of argument let's assume she purchased each property at 700k. TIA |
Anonymous
| If she’s been declaring the income from her rental on her taxes then she’s been taking depreciation. Once she sells she’ll need to recapture that. Normally that’s where the insane tax bill comes in. |
Anonymous
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What does "recapturing" mean? Sorry, I am not a money person. Thanks for your reply.
-op |
Anonymous
So basically all of the writeoffs she was eligible for, once she sells the government wants 25% of them back as "recapture tax". If she has gains left after that, then she owes cap gains on those. |
Anonymous
| She had to “depreciate” the values each year because they were a business asset. Which means when she goes to sell, her gains are higher then just market value minus what she paid. |
Anonymous
Close by no cigar. Even if she hasn’t been claiming depreciation the IRS assumes she was and recaptures it regardless. |
Anonymous
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Bought house $1M
Sells house $1.5M Gross 500,000 minus: any work done on house... painting, new floors, new roof, new water heater, new air conditioner, etc Net: XXX Pay capital gains on that. Is that correct? |
Anonymous
I don’t think new roof, new water heater, and new ac count because they’re maintenance, not improvements. Also, there will be recapture of depreciation. |
Anonymous
| I am going to sell a condo that I have been renting out for about 15 years. My accountant estimated that I was going to owe 30-40k from the recapture of depreciation (I haven't put it on the market yet). My condo was bought for 160 and is now 275 ish. There could be more taxes on the gains. Your sibling needs to look into tax loss harvesting. |
Anonymous
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She could buy another rental property with the proceeds, in which case it's a transfer and she pay no taxes (from what I understand). Then a couple of years later she can sell that rental property for the same as she bought it for. In that case she only pays depreciation for about 2 years she owned a new property, and if she doesn't make profit on selling it no tax to pay. If she buys new property with cash and sells it, she keeps most of the cash.
Is this true or hearsay? Maybe I am wrong, but often times rental RE holders are forced to do the conversion because depreciation is only valid for about 27 years, then you lose it and have to pay your regular income tax on rental income. |
Anonymous
That's called a 1031 exchange. It's complicated, but possible. |
Anonymous
No. The work done was deducted in the year it was accured, on her Schedule E. Then you left off depreciatino, which needs to be recaptured at sale time. |
Anonymous
| Depreciation basically negates the benefits of having a rental property. I had a property that had lost about $85k of value by the time I sold it and it basically negated the taxes I’d have owed. |
Anonymous
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There are several online capital gains calculators that are easy to use. Kind of surprising that she didn't spend 5 minutes running the numbers. The only number you need that might be somewhat difficult to figure out is how much depreciation taken since purchase.
Just to give you an idea of a 350k house that I'm about to sell. It's almost paid off and this is what the calculator says: 15k fed depreciation recapture 15k VA cap gains 30k fed cap gains So total taxes equals approx 16% of sales price. |
Anonymous
can you link the calculator please? |