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Tax Tip of the Week | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental? December 13, 2017

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes , trackback

Tax Tip of the Week | Dec 13, 2017 | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental?

One of the biggest tax surprises of our clients arises from the income tax liability caused by the sale of their rental property.

Here is how such a surprise typically unfolds:

The daughter heads off to college. Cash is needed for her tuition. Mom and dad decide to raise cash by selling their rental property. They paid $100,000 for this property which has now been rented for about fourteen (14) years. Net of selling expenses, the rental property is sold for $100,000. So far so good. The net sales price and the purchase price were identical. Mom and dad would have liked to sell the property for more but it is what it is. At least from a tax standpoint, mom and dad think they are home free – no gain, no income taxes. WRONG! They forgot to consider the depreciation expense that was taken over the fourteen (14) year holding period. That expense amounts to $45,000. So now, instead of the property basis or net book value being $100,000 as they guessed; it is $55,000 or the $100,000 less the depreciation expense already taken of $45,000. Now mom and dad’s taxable gain has climbed to $45,000. Mom and dad are not happy! Uncle Sam is going to take a chunk of their monies planned for tuition. Hmmmm…not good!

Now let’s look at how the federal income tax is calculated.  Since the property had been held for more than one year, the gain is a long term capital gain. However, this type of capital gain on the depreciation recapture may be taxed as high as 25%. Had the sales price exceeded the purchase price – conventional capital gain rates would have applied instead but only for that difference including the gain on the land portion. So their federal income tax may be as high as 25% of $45,000 or $11,250 – all resulting from the depreciation recapture. Not a pleasant surprise!

Always, know what your tax consequences may be before embarking down a road.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author….Mark Bradstreet, CPA

…until next week.


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