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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121097  
Subject: Re: Capital Gains on Rental Property Date: 1/31/2000 1:02 AM
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I have some rental property that I would like to sell. How can I calculate the amount of capital gains that I will have to pay? Here is some info: Have had the property for 15 years. Has been depreciated the entire time and has been used as rental property the entire time. Normal taxable income on 1040~50K. Can anyone help? Thanks

Let's take a stab at a quick and dirty method - should get you close.

First - your basis in the property is your original cost, less depreciation taken to date, plus any capital improvements you've made over the years. 15 years ago, when you started depreciating the property, you could take much faster write-off's than are allowed now. So -- your basis could be pretty low - maybe down to just about the land value.

The difference between your expected net selling price (that's the price after the commission and other closing costs) and your basis is the gain. Don't let any mortgage amounts confuse you - basically just ignore them in this calculation.

Now that you've got the gain amount, we need to split it into the amount that will be taxed at ordinary rates and the amount taxed at capital gain rates. Part of your gain is attributable to the depreciation you've taken over the years (remember that it reduced your basis). Here's where it gets fun. We now have to look at the depreciation method you were using. I'm assuming, based on the 15 year holding period, that you are using the old ACRS method which was an accelerated depreciation method (i.e. faster than straight line). The depreciation in excess of the amount allowed using the straight line method is recaptured as ordinary income. (IRC 1250 as I recall). The balance of the gain is eligible for capital gain rates (IRC 1231).

All of this is reported on form 4797. Unfortunately, this is arguably one of the worst forms put out by the IRS. It will get the right answer, but it's best if you know what the answer is supposed to be before you start. That way, you know if you completed the form correctly. From there, some of the gain will go on to the front page of your 1040 (the depreciation recapture part) and the rest will go to schedule D, where it gets netted with any other capital gains.

So there really is no short answer to your question. Hope all of this long-windedness helps.

--Peter
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