for 100k gain, you will need to pay at least $58632. My income is in the highest rate and I have to pay 20% for the gain and 25% for recap and additional 3.8% for the net investment income tax. Then, for me: total tax is 41816(20% tax for long term capital gain), plus 27270 (recap tax at 25%),plus 7945 (3.8% investment tax on long term capital gain). So total tax is $77031!!! cry, cry and cry... It seems that buying rental property has no tax advantages either. Here is what it said from google
example:
I am selling a house in Pennsylvania that I have rented out as an investment for the past 10 years. I want to take the money I make on this sale (paid $400,000, selling for $500,000, made no capital improvements and not paying any sales commissions or closing costs, so net cash profit should be about $100,000) and pay down my mortgage on my Maryland principal residence. What are the tax implications?
Congratulations on successfully investing in a rental property. When you sell your rental property, you will incur federal and state capital gains taxes. Capital gain is the difference between your selling price and your adjusted tax basis. The IRS classifies capital gains as either short- or long-term. Gain on the sale of property held for one year or less is considered short term and is taxed at your ordinary income tax rate. Gain on sale of property held for more than one year is classified as a long-term capital gain and is taxed at rates ranging from 0 percent to 20 percent. Most homeowners will pay at the 15 percent rate.
Although you state that your net cash profit is $100,000, your taxable long-term capital gain is $209,080. Assuming you are in the 15 percent capital gains tax bracket, your capital gains tax liability would be $31,362. This number is calculated by starting with your net sales price of $500,000 and subtracting your adjusted tax basis of $290,920 (which is original cost, $400,000, minus accumulated depreciation, $109,080). The result is your $209,080 capital gain. At the 15 percent tax rate, your long-term capital gain tax liability is $31,362. After federal capital gains tax, you are left with only $68,638 to prepay your existing mortgage. But it gets worse.
IRS regulations generally require that you depreciate your rental property over 27.5 years, or 3.636 percent per year. To calculate your depreciation deductions, we assume that your $400,000 purchase price was allocated between the land valued at $100,000 and the improvements valued at $300,000. You stated you made no other capital improvements. So, you were able to take $10,908 annual depreciation expense deductions on your tax return (3.636 percent X $300,000) for each full year you rented it. This non-cash tax deduction reduced your taxes on an annual basis. But now that you are selling, this non-cash tax deduction must be paid back in part, as depreciation recapture tax.
Because land does not wear out, the IRS does not permit you to depreciate the purchase price attributable to the land. When you apply the 3.636 percent annually against your $300,000 depreciable basis for your 10-year holding period, you have taken $109,080 in accumulated depreciation deductions. That amount will now be “recaptured” and taxed at the 25 percent tax rate. So, in addition to your capital gains tax, you will incur $27,270 in depreciation recapture tax.
You may also incur the new Net Investment Income Tax. That tax imposes an additional 3.8 percent tax on your net investment income above certain thresholds.
example:
I am selling a house in Pennsylvania that I have rented out as an investment for the past 10 years. I want to take the money I make on this sale (paid $400,000, selling for $500,000, made no capital improvements and not paying any sales commissions or closing costs, so net cash profit should be about $100,000) and pay down my mortgage on my Maryland principal residence. What are the tax implications?
Congratulations on successfully investing in a rental property. When you sell your rental property, you will incur federal and state capital gains taxes. Capital gain is the difference between your selling price and your adjusted tax basis. The IRS classifies capital gains as either short- or long-term. Gain on the sale of property held for one year or less is considered short term and is taxed at your ordinary income tax rate. Gain on sale of property held for more than one year is classified as a long-term capital gain and is taxed at rates ranging from 0 percent to 20 percent. Most homeowners will pay at the 15 percent rate.
Although you state that your net cash profit is $100,000, your taxable long-term capital gain is $209,080. Assuming you are in the 15 percent capital gains tax bracket, your capital gains tax liability would be $31,362. This number is calculated by starting with your net sales price of $500,000 and subtracting your adjusted tax basis of $290,920 (which is original cost, $400,000, minus accumulated depreciation, $109,080). The result is your $209,080 capital gain. At the 15 percent tax rate, your long-term capital gain tax liability is $31,362. After federal capital gains tax, you are left with only $68,638 to prepay your existing mortgage. But it gets worse.
IRS regulations generally require that you depreciate your rental property over 27.5 years, or 3.636 percent per year. To calculate your depreciation deductions, we assume that your $400,000 purchase price was allocated between the land valued at $100,000 and the improvements valued at $300,000. You stated you made no other capital improvements. So, you were able to take $10,908 annual depreciation expense deductions on your tax return (3.636 percent X $300,000) for each full year you rented it. This non-cash tax deduction reduced your taxes on an annual basis. But now that you are selling, this non-cash tax deduction must be paid back in part, as depreciation recapture tax.
Because land does not wear out, the IRS does not permit you to depreciate the purchase price attributable to the land. When you apply the 3.636 percent annually against your $300,000 depreciable basis for your 10-year holding period, you have taken $109,080 in accumulated depreciation deductions. That amount will now be “recaptured” and taxed at the 25 percent tax rate. So, in addition to your capital gains tax, you will incur $27,270 in depreciation recapture tax.
You may also incur the new Net Investment Income Tax. That tax imposes an additional 3.8 percent tax on your net investment income above certain thresholds.
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