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Calculating capital gains

Forum|Forum|6 years ago
January 17, 2020
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My husband purchased a condo is 2008 for $98,000 right before the housing market crash. Property values dropped overnight to $30,000-$40,000. We lived in the unit till 2013, and when we bought a house, we opted to rent out our unit to pay down what we still owed on our mortgage. The housing market has come up and we could sell for about $75,000, and we have paid down some, but we still owe $75,000. We don't live close to our rental property and we aren't making any profit, just breaking even, so we are ready to be done with the place. We know we can sell for what we owe, but we likely won't get much more than that. We are worried about capital gains tax, because we can't afford to take a huge loss at tax time.

If we sell for less than we paid initially, do we owe capital gains?

Most brackets say that if you make more than $76,000 in income tax, you pay 15%. We make more than $76,000, but we will not be making any money on the rental property, will we still have to pay a capital gains tax?

Can we deduct what we still owe for our mortgage from our capital gains?

My husband thinks that we will have to pay about $10,000 in capital gains tax, but if that is the case, we will be stuck with this property for another decade or more. Please advise us as to how we can sell the property this year, and break even.

Other than capital gains tax, what other fees or taxes are typically associated with selling a rental property?

Best answer by AmyC

The question is not if you sell for less than you paid; but, is your basis greater than the sales price. Depreciation is always the biggest concern. You have been renting the property, claiming depreciation each year. You also claimed expenses while renting the property on your tax returns.

Your basis in the property is what you paid for it plus improvements you made that were not claimed MINUS all the depreciation you have taken plus expense of sale, commissions, etc.

For example: $98,000 purchase +0 improvements + $5000 sales expenses minus $15,000 depreciation = $88,000 basis.

Take your newly calculated basis and compare it to the sales amount to determine your capital gain.

Pretend you sell for $75,000 and you have a loss on the property. If you have a loss, you will not have capital gains.

I don't believe you will have capital gains regardless of your income level based on your scenario. You need to do the math with the real numbers.

The IRS is not concerned with mortgages. You can not deduct what you owe from your sales price, capital gains, anything.

The only other tax you may incur is state tax where you own the property. Each state has different rules. Here is a link to all states.

N

NCPERSON1

the answer is going to be dependent on how much you have depreciated the condo on your taxes over time.

more likely, you have a loss, not a gain so it could save you taxes... but without additional numbers it's hard to pin it down.

the mortgage has nothing to do with the calculation...

the profit / loss is based on a) what you paid for the property (add in the closing costs from the purchase), b) what you sold the property for (less the costing costs from the sale) and adjusted for the depreciation since the beginning.

I am sure others with respond with more specifics.

V

vizchristine

Does the mortgage go into calculating one's basis?

F

FangxiaL

No. The mortgage is not added to the basis of your property, nor it is subtracted from the sales price.

The cost basis of your property is generally the price you paid for it. If you made home improvements on your property, it can also increase the cost basis, if the improvement adds materially to the value of your home or prolong your home's useful life significantly.

@vizchristine

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A

AmeliesUncle

Just some ESTIMATED numbers:

Most likely you will not have ANY gain or loss on the tax return. I crunched some numbers using both $40,000 and $60,000 as the Fair Market Value in 2013, then renting it for 7 years. Both resulted in no gain or loss, so it would not affect the amount of tax on your tax return.

However, TurboTax is NOT set up for this scenario, so you would probably want to go to a tax professional this year.

AmyCAnswer

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