How do capital gains get calculated in California?

[Account Closed]

we are selling a property (rental for past 7 years) and need some guidance on how to calculate Capital gain and depreciation. Property was purchased for 210.000+closing costs (about 3.000) in 2001. In 2011 it was converted into a rental (relocation). Since then we refinanced (cost about 2.000) and spent about 15.000 on repairs. If we sell it for like 290.000 and the real estate agent charges 4.5 percent +closing costs, how much would be the taxes on the depreciation and capital gains? as far as I understand we will only pay tax on the difference between the 210.000+costs and the selling price. The difference between the 210.000 and whatever I already paid of on the loan is ours tax free, right?

[Michael Plaks]

Originally posted by @Account Closed:

The only part I don't understand is the depreciation tax. It was a primary residence for 9 years and a rental for 7. How do they calculate that? The 25% is of what exactly? The profit? How do I know how much the depreciation was ?

During the 7 years of this property being a rental, you were supposed to deduct depreciation, somewhere in the area of $5k per year, per my very rough estimate. I'm skipping the explanation of how it is calculated. 

Over seven years, you should have accumulated maybe $35k worth of these deductions. When you sell, you must reverse these deductions and pay tax on it: up to 25% Federal tax plus CA state tax. This is usually referred to as depreciation recapture.

It sounds like you were not taking depreciation deductions. Bad news: the IRS will still tax you on the reversal of these unclaimed deductions! This calamity can be corrected, but it is not a DIY project and requires an accountant specializing in real estate and familiar with Form 3115. Not many are.