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ballard3_5

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Posts: 3
Reply with quote  #1 
Hello,Has been driving me nuts and my tax guy can't give me an answer, says "see me in July" after you sell.

I'm  trying to figure out how much I will owe IRS if I sell my single family rental.

I know there's "depreciation recapture" and capital gains, are they intertwined or 2 separate entities ?

Please don't try to explain because I'm too dense to figure out lol.

Here's the story:
I bought the house from a relative in the 1980's  for 1.00 on paper (lineal descent)
I put about 57K into it,
I lived in it from then until 2008, when I started renting it out.
I have taken about 35K in "depreciation".
On the capital gains is the cost basis the original purchase price or the value when I began renting it out ? how does one determine the value at the beginning of the rental.
I think it was worth about 170K or so in 2008, I would sell for about 200K (less commissions and fees) now (needs work).
I make about 52K a year from my job.
Anyone have a ball park idea what I would owe IRS total ?
No commitments I'm just trying to get an idea, giving me a wicked headache.
Thanks
Does anyone know what ballpark



AccidentalRental

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Posts: 53
Reply with quote  #2 
I'm not a tax guy but I don't think there is enough information.  Your cost basis is neither your purchase price ($1) nor the value when you started renting it out.  Your cost basis is determined by the value of the property when you inherited it (stepped up cost basis).  You need to estimate the value of the property at the time of the inheritance.  

Let's say it was worth $100k when it was inherited, then that is your cost basis starting point.  Now add your improvements, subtract depreciation taken and that is roughly your new cost basis.  So $100k + $57k - $35k = $122k cost basis.  If you sell it for $180k net of costs then you are looking at roughly $58k taxable gain.  The gain should be taxed at LT Cap Gains rate + your state/local rates.  I would approximate your taxes around 25% of that taxable amount or about $15k.

I know a great RE tax guy if you want to PM me I can give you his info.

Good Luck!

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Domenick | AccidentalRental - A profitable resource for new landlords

ballard3_5

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Posts: 3
Reply with quote  #3 
Thanks for the info.
It was not inherited though, I bought from a living relative.
Does that change anything ?
AccidentalRental

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Posts: 53
Reply with quote  #4 
Yes.  That changes your basis.  If it was gifted to you as it seems, then the previous owner's basis passes through to you.  Assuming your relative had a cost basis of $50,000 when gifted to you, then your basis starts at $50,000.

$50k + $57k - $35k = $72k new Cost Basis in this example.  

$180k Net Proceeds - $72k Cost Basis = $108k Cap Gain.

I would plan on $25k - $30k in taxes Fed and State in this scenario.

Again, I'm not a tax guy so definitely speak with one who will help you understand the tax implications before you close the deal.  A good RE tax professional will be able to help you strategize ways to minimize this impact (e.g., 1031 exchange, etc.).

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Domenick | AccidentalRental - A profitable resource for new landlords

ballard3_5

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Posts: 3
Reply with quote  #5 
Thanks for the input.
But I was wondering though shouldn't the cost basis be the value of when I started renting it out ?
I bought for 1.00 in 1988....I lived in it from then until 2008.
I started renting it in 2008.
AccidentalRental

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Posts: 53
Reply with quote  #6 
I assume you didn't transfer the property at fair market value into a legal entity so I don't think your basis is stepped up to the value on the day you started renting it out but I could be completely wrong on this.   Best to find a professional who can advise you correctly.

Good Luck! 

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Domenick | AccidentalRental - A profitable resource for new landlords

LLinVA

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Posts: 226
Reply with quote  #7 
Just skimming the other responses, they look right.

My main answer is: you need a new tax guy. If he is too busy to help you, then he isn't concerned about keeping your business. Talk to two or three new ones and pick a new one.
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