How do capital gains get calculated in California?

Question

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 · Answer

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.

Michael T. · Answer

Account Closed yes a lot of the information you have is correct.

Your gain is actually your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments.)

Deductible closing costs include points or prepaid interest on your mortgage and your share of the prorated property taxes.

Examples of selling costs include real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees.

If you have any additional costs that coincide with these costs include them in your overall numbers and it will help your reduce your total.

Account Closed · Answer

I hope you mean 15%

Basit Siddiqi · Answer

Account ClosedWere you preparing the tax returns while the property was a rental or did you have an accountant prepare it for you?

The tax returns should be rolling forward the "accumulated depreciation" on the property which is the depreciation taken on the property since it was a rental.Your taxable gain will be selling price less selling expenses less adjusted basis.Adjusted basis is purchase price + improvements less accumulated depreciation.Depreciation recapture will be taxed at a maximum federal rate of 25% + California marginal tax rateThe rest of the gain will be taxed at federal capital gains tax rate(0%, 15% or 20%) + California marginal tax rate.The gain may also be subject to net investment income tax(3.8%)

Account Closed · Answer

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 ?

Sam Shueh · Answer

Suggest to talk to your CPA....

Matthew Creel · Answer

Your capital gains rate will depend on your level of income for the year (see below).  The realized gain that will be recognized and taxed will be the final sales price less your "adjusted" cost basis less any selling expenses you incur.  The adjusted cost basis will generally be your acquisition cost plus and capital improvements less any depreciation taken. You mentioned repairs in your post.  Those are generally deducted in the year incurred and are not an addition to your cost basis.

2019 Capital Gains Tax Brackets

In regards to depreciation.....If depreciation has been taken on the property in the past you will "Recapture" that past deduction in the year of sale and it will be taxed at a 25% rate instead of the applicable capital gains rates you see listed above.

Matthew Paul · Answer

I think in California they tax capitol gains at 150% .

How do capital gains get calculated in California?

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