Rental Properties and Capital Gains

[Samantha M.]

When you go to sell your rental property, typically how much do you lose to capital gains taxes? For instance I have a rental property we purchased in 2008 for about $60,000 after rehab and fast forwarding several years the fair market value of that house is about $115,000.

How would capital gains work in this case, I assume they will try and get me on the $115,000 even though I purchased it for $60,000. The amount in capital gains I have to pay, is that a percentage? I am not thinking about selling anytime soon, it just seems like if you are in the market to buy and hold and buy low and sell when the market recovers alot of your profit margin will be eaten away by capital gains.

Thanks everyone

[Jon Holdman]

You first need your basis. That's the price you paid plus any acquisition costs, plus any capital improvements, minus deprectiation. For the depreciation, its the amount you actual took or the amount you could have taken ("allowed", in IRS parlance), which ever is more.

Now, take you the price you sell it for, less any sales costs (commissions, concessions, title fees, etc.) Subtract your basis. That's your net gain.

Now, you divide into two parts. The amount up to the depreciation (taken or allowed, again, which ever it more) is subject to a tax on the unrecaptured depreciation. That tax rate is your ordinary rate, but its currently capped at 25%. Any remaining portion of your gain is subject to capital gains tax. Currently that's your ordinary rate if you're held it under a year, 15% if you're held it more than a year.

Unfortunately, the article referenced by Andrew O. looks to me to be overly simplified and inaccurate.

An additional twist on this is that if you have carryforward disallowed passive losses these can be taken against the gain. They don't even have to be from the same property. So, if you have disallowed passive losses from your properties, and you're carrying those forward and you sell one property, you can use those disallowed losses to offset some of the gain.