Question

Sanity check: capital gains listed is higher than the profit made

Forum|Forum|4 years ago
March 27, 2022
2 replies
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Question: what goes into the profit calculation for the sale of a rental property? My gain is listed as a lot higher than the profit I made, so I want to see if this can be expected vs whether it means I made a mistake somewhere.

Details:

I had a property that was my primary residence for 5 years, then a rental property for 3+ years. Last year I sold it for a large profit, but I notice that it's being listed as income higher than the profit:
bought for: 555K
sold for: 920K (profit: 365K)

But in my Federal income section, I see 'Sale of Business Property': $519,522
Then in my state, it's listed as: Capital Gains Taxable at 5%: $522,881

Are there different factors that are included aside from the purchase price and sale price? Could this be normal, or did I make a mistake?

thanks in advance for your help!

Carl11_2

Employee

When you sell a rental property, all prior depreciation is recaptured in the year of sale and taxed. So it's that three years of depreciation for the years it was a rental.

Even if you did not take depreciation, you are still required to recapture and pay taxes on the depreciation you "should" have taken.

If you reported it correctly in the SCH E section of the program, the recaptured depreciation is taxed at the ordinary income tax rate, while your capital gain on the sale is taxed at the capital gains tax rate.

Are there different factors that are included aside from the purchase price and sale price?

I can't speak for a state return. But my guess would be that the state taxes your depreciation recapture differently.

KrisD15

Yes, there is another factor besides purchase price and selling price and that is DEPRECIATION.

When you sell a business asset, in this case the rental, the depreciation you claimed will need to be "recaptured" or paid back.

Basically you take the purchase price (or whatever your basis is) and subtract the depreciation. It doesn't even matter if you remembered to claim the depreciation yearly on your tax return, the IRS makes you recapture depreciation whether you claimed it or not.

Now this basis adjusted for deprecation is subtracted from your sale price. The gain attributed to depreciation is listed as ordinary (personal) income, the gain attributed to the increase in value is capital gain.

@ok4mee

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Carl11_2

Employee

@KrisD15 the question pertains to the difference between what's taxable at the federal level, and what's taxable at the state level. Now I don't know enough about state taxes to provide a definitive response. But looking at the difference between the two, it appears to me that the state is taxing the gain, as well as the depreciation at the same rate. It's just a guess, as the difference between the two figures looks to me like it could be the amount of depreciation taken over the 3 years it was a rental.

M

Mike9241

for federal gain would be

sales price

less sales expenses

less cost

plus the larger od depreciation allowed or allowable.

in addition, if during any 2 year period during the 5 years before the sale you occupied the property as your principal residence would you'd be entitled to a home sale exclusion of up to $250,000 (filing single) for any gain exceeding the depreciation recapture.

less than 2 years a partial exclusion might be available.

some states use a different depreciation rate than federal

your gain seems incorrect but we can not see your entries. contact support would be advisable because you can allow them to view your return'