capital gains

Forum|Forum|3 years ago
February 20, 2023
2 replies
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The difference between our tax due last year and this year is about $14K and the only difference of significance is that we sold a rental property after 11 years of ownership, some improvements and about $44K in depreciation. The sale price was about $30K more than the purchase price. I didn't expect to pay that much more in tax. Our wages and other income total about $230K (mfj). TurboTax calculates the capital gains to be about $58K. Is it correct that we'd owe $14K more due to a $58K LT Gain? That's about 24% (14/58).

Mike9241

your gain is:

your gross tax basis - the purchase price plus the cost of improvements plus certain closing costs reduced by depreciation plus selling costs. so roughly the $30K gain you mention + the $44K in depreciation less improvement and selling costs so a total gain of $58K is possible. of that gain the $44K in depreciation is section 1250 recapture which can be taxed at 25% so $11K in taxes + $14K of capital gain ($58K minus $44K) taxed at 15% so about $2K in taxes. because that income can affect other items on your return an increase in taxes of $14K is reasonable. section 1250 is long-term capital gain but there is a special rate applied to it that is not always the same as for other long-term capital gains. there is a worksheet in Turbotax that calculates his tax. look at schedule D line 19.

KrisD15

When you sell a rental, the depreciation Recapture (in your case 44,000) is Ordinary Income and taxed at your tax rate.

The profit (selling price minus original cost) is Capital Gains, which in your case sounds like about 30,000.

So I see 44,000 additional income and about 30,000 capital gain. 74,000 total.

If you are seeing 58,000 long term capital gain, I would say something wasn't entered correctly, such as the depreciation or if you had other assets listed, but from what you describe, I would think the income would be MORE unless you show 58,000 Capital Gain AND Ordinary Income from the depreciation recapture.

Be sure to report the sale of the rental in the rental section, NOT AS A SALE OF A BUSINESS ASSET.

Enter the rental income and expenses and enter that the rental was sold and the date. Return to the rental section, click edit, scroll down to Assets/Depreciation and finish the interview regarding the sale of the rental property

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Carl11_2

Employee

Here's what I see as most likely. If its not the culprit, then it's probably a contributing factor.

If you have multiple assets listed in the assets depreciation section, my guess is that you entered your sales price for the property/land only, and entered a $0 sales price for the other assets. That creates a problem.

When you sell at a gain, you have to use a sales price that will show a gain on every asset listed. If you show a gain on some assets and a loss other other assets, then the recaptured depreciation on the "other" assets is included in the capital gains, instead of being corrected recaptured and taxed at the "ordinary" tax rate.

Now it doesn't matter if you show a $1 gain on some assets, and a $100,000 gain on other assets. A gain is a gain. You need to ensure that you show a gain on all assets so the program can correctly recapture and correctly tax the gain, as well as the recaptured depreciation on each asset sold.

Keep in mind that to show a gain on each asset, the math is:

sales price, minus cost basis, minus sales expenses. The sum of that basic equation needs to be at least $1 more than the cost basis. Additionally, the sales price of all assets needs to add up exactly to the sales price of the property.

Also, make sure your sales price on the property and land is proportional to the cost basis for the property and land. Otherwise, you may be claiming more (or less) SEC 1250 taxable gain than you should.