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We have sold one rent house for a profit of $53,000. I do not know our income for last year (the taxes are at home and I am on vacation). But, for the sake of discussion, let's say our 2018 income was $40,000. Also, for the sake of discussion, let's leave out the improvements, repairs and depreciation - just to simplify things...

While it may 'simplify' things to ignore depreciation, it isn't correct. The issue is, you have to recapture the depreciation that you *should* have taken - even if you didn't take it. And that recaptured depreciation will add to your ordinary income - which will adjust the amount of capital gains tax that you end up paying.

So, let's look at a more detailed picture:

Original purchase price: $150,000 ($110k for the house, $40k for the land)
Depreciation per year of ownership: $110,000/27.5 = $4,000 per year

Let's say you owned the property for 7 years, so you had $28k of depreciation

Your adjusted basis is now $150,000 - $28,000 = $122,000

Let's further say that after the renters moved out, you had $10,000 in allowable fix-up/update expenses to put the house on the market

Your adjusted basis is now $122,000 + $10,000 = $132,000

Sell for $220,000 with $7,000 in selling expenses

Your profit is now $220,000 - $132,000 - $7,000 = $81,000 - of which $28,000 is depreciation that will need to be recaptured, so $53,000 will be taxable at capital gains rates.

Assuming you are both over 65 and not blind, your standard deduction for MFJ will be $26,600 So if you have $40,000 in ordinary income, here's what your taxes will be:

Ordinary income:

$40,000 ordinary income + $28,000 recaptured depreciation - $26,600 standard deduction = $41,400 in taxable ordinary income

The MFJ ordinary income tax rates are

10% for up to $19,400
12% for $19,401 - $78,950
22% for $78,951 - $168,400
24% for $168,401 - $321,450
32% for $321,451 - $408,200
35% for $408,201 - $612,350
37% for $612,351 and higher

So your taxes for your ordinary income will be:

$19,400 taxed at 10% = $1,940
($41,400 - $19,400) = $22,000 taxed at 12% = $2,640

Capital Gains:

The MFJ capital gains tax rates for 2019 are

0% up to $78,750
15% for $78,751 - $488,450
20% for $488,451 or more

where the capital gains are counted on top of ordinary income

(Please note that the capital gain bracket breakpoints no longer align with the ordinary income tax bracket breakpoints - so there is no more 'just stay in the 12% bracket' to pay 0% on your capital gains)


So, your taxable ordinary income of $41,400 is added to your capital gains of $53,000, for a total of $94,400

What is taxable at the 15% capital gains rate will be $94,400 - $78,750, or $15,650

So, your capital gains tax will be $15,650 x 15%, or $2348 (rounded up)

Your total tax liability will be

$1,940 (10% bracket)
$2,640 (12% bracket)
$2,348 (capital gains 15% bracket)

$6,928 (total)

AJ
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