Sale of a Rental Property Tax Consequences & Depreciation Recapture
Вставка
- Опубліковано 12 сер 2019
- In this video, we discuss the sale of a rental property and the expected taxes associated with the gain on the sale of the rental property. You need to take into consideration the depreciation recapture which taxes a portion of your gains at a higher tax rate than your long-term capital gains.
The sale of rental property tax treatment will be a combination of capital gains composed of usually long-term capital gains taxed at either the 15% rate or 20% rate and also the higher 25% rate of depreciation recapture. So if you were wondering about the rental property tax or the sale of rental property tax treatment, this will be a great video for you.
This video focuses on the federal income taxes with the IRS. Depending on your state, your state-specific taxes will be unique to the state that you live in for the rental property sale.
Additionally, this video focuses on the capital gains on the sale of the rental property. Please refer to our other videos for accumulated losses that get released during the sale of the rental property. Please refer to our other videos for rental property activities and deductions on the Schedule E for the years that you are renting out your property for recording the rental income and rental deductions. We have a great video about most frequently missed deductions for rental properties and the Schedule E.
And as always, please leave us any comments or questions below, we'd be happy to get back to you.
Thank you!
From the ClearValue Tax Team.
For more information, check out our helpful website: clearvaluefinance.com/
Thanks for the info. What about capital losses as it relates to depreciation?
Link is broke.
Like is broke.
Looks like the website is not working. Are you still in business? And are you still taking on new clients?
Great info, but if I claim $2,000 of depreciation, it doesn't mean that I am bringing $2,000 to my pocket, so why does the IRS recapture $2,000? Or, will I get my $2,000 as long as I have the receipt?
I can not believe I was able to follow everything you said, only because of the pains you took in explaining this video in way regular joe's like me can understand. Thank you very much !!!
This was one of our more technical videos!!! If you can follow, that's awesome!
@@clearvaluetax9382 The house fair market value is $240,000, but I Sell it to my brother for $ 67,000.
What is my Sale Tax on this house ??
I'm an auditor for a taxing agency. This is one of the best informational videos that I have seen on the subject. I enjoy all of your videos. Keep up the good work.
Did he miss explaining at the end that your taxable income also is a factor in what rate you pay in capital gains taxes?
Single
0% rate - $0-$40k income
15% rate - $40k-441,450 income
20% rate - over $441,450 income
Married filing joint
0% rate - $0-80k income
15% rate - $80k - $496,600
20% rate - over $496,600
My son and I watch your current videos almost daily and this goes to show, YOU ARE THE GOAT! Thank you for providing value to us as we grow our tax practice! This was so freaking helpful!
I cannot count how many times I have researched depreciation recapture and tried to understand the posts, blogs, and "tax advice" pages I have visited that "attempt" to explain this tax, and always come up scratching my head a bit and throw in the towel. I can honestly say this is the first time the entire concept of depreciation recapture has crystallized (for the layperson) in my head to the point where I can pick up a calculator and actually attempt to figure it out and feel reasonably okay with my calculations (yet of course I seek tax advice). So again I cannot thank you enough because after selling a property last year I have had so much angst, heartburn, and even lack of sleep about this as tax deadline looms SO close. THANK YOU -THANK YOU -THANK YOU from a "new" subscriber :) PS. My tax advisor stated that acquisition closing costs are usually not included in the basis, but he did not seem very confident of his statement about the acquisition closing costs. So I may be contacting you :)
Idk how I didn’t find this channel before!
This is the best channel on UA-cam.
Thank you so much Brian. Can’t believe my CPA doesn’t explain this to me. I’m selling my rental property and have questions about this topic. You just answer my questions. My CPA would have charge me a zoom meeting to discuss this topic with them.
CPAs didn't go to school to teach accounting, they went to school to apply accounting to the real world. If you want to know, these types of videos and the entire damn internet is at your disposal.
Yeah, we are really busy. We charge for our time.
You truly know your stuff, and is amazing at explaining those complex tax issues in a way that can be so easy to understand. Love these videos. Wish you can be my CPA one day.
A-MA-ZING!!! I have been trying to figure this out all day long. Thank you, thank you, thank you! NO ONE has explained it as well as you just did and I get it now 🙏🙏🙏
Very clear. I watched a 2 hour video last night and fell asleep still not understanding! Thank you !
Outstanding video!! You explained it so eloquently in such a short period of time better than my own CPA did! I was able to follow through the entirety of video without any issues. Truly helped so much!!! The part where you said the accumulated depreciation recapture is greater for a long term rental vs one that’s been rented for 1-3 years was the part that helped solidify my decision to go ahead and sell the rental. Well first going to attempt the 1031 but I feel more informed now than I did earlier!
Awesome video! Logically arranged, clearly explained, detailed and well spoken. Voice and mannerisms kept the video interesting until the end. Well Done!
I can't thank you enough for all of your videos. They have been VERY informative and you explain it so well. Thank you
I'm an engineer and I know numbers... but not financial numbers. It seems calculus is easy but accounting is hard. Thanks for the excellent explanation on depreciation and calculating taxes including the depreciation recapture tax. You've made it easy "even for an engineer" to understand.
This helped me a lot in trying to learn about 1031 exchange. Thank you and you earned a subscriber.
Awesome, I'm happy to hear it helped. Thanks so much Jackygiant!
This is a great video. I'm excited to see more in the future.
Thank you Alexander!
@@clearvaluetax9382 Hello, I am Happy you are married...👍👌💟👨👩👧👧
My house Fair market value is $ 240,000. But I Sell it for $ 67,000 to my own brother.
So What is the Sale Tax for me... ????
First time i’ve ever understopd depreciation recapture! Thanks!
You explained things so that I could easily understand my tax situation when I sell my house.
Thanks for putting out a video that people can easily follow.
This is the best video I have seem on the sale of rental property. Very clearly explained, thank you.....
This helped me better understand the whole basis issue a lot. Much appreciated. Hope you do more of these.
I love how you explain in detail. I actually learned something. Thank you so much. Kuddo to you to for explaining it very clearly.
FINALLY!!! Someone who explained it clearly and wasn't all over the place.
I so understand it the way you explain it, I have the job of explaining that to my brother in law. WOW !!! No wonder I din't choose to be an accountant. Thanks again.
jajajajaja thanks again E Galindo!
Greay video. Easy to follow and understand. Here is my situation. Purchased our Condo back in 2005 for $128,000. Converted to Rental in 2012 and sold it Jan 2019 for $104,000. We never took the depre expense for those 6yrs. We took the FMV that it was in 2012 at the time of the conversion which came to $54,700 as the cost basis to determine depreciation recapture (54,700/27.5 =1989) 1989x6(yrs)=$11,934
We found closing costs on the sale for $2675, so we added that $54,700 which came to $57,375 no commission which became our Cost basis plus expenses. Then we took $57,375 minus $11,934 (deprec we should have taken) = $45,441 which is our Adjusted Basis. So our total gain is $58,559 (104,000-45,441). So my understanding the first $11,934 deprec recapture will be taxed at 25% and the remaining $46,625 ($58,559-11,934) will be taxed at our Capital gain rate correct? Did we figure this out correctly since we did not take the depr expense at all? And do we put this on Form 4797 Part III section 1245 lines 20 through 25b?
Great explanation. Loved the examples, made it very easy to follow.
I will be selling my rental property in 2022, and will use this information to estimate my capital gains tax.
You explain all of this so well! I do have a question about the depreciation component of the cost basis. Is this depreciation that you are subtracting supposed to include the accumulated depreciation of the Improvements? Thank you!
Amazing video! Many doubts solved! Waiting for more videos!
Marcelo, first of all, you are awesome! Thanks for the support and encouragement, you're a blessing! Yes, I'm going to make a lot more videos this year!
Greetings Clear Value Tax, you are awesome Brain, as you answered my questions, I have subscribed and hit the thumbs up button. Thanks for sharing.
Thank you Brian. Another great video
Thanks for your detailed explanation. I understand depreciation recapture etc. But how do I translate all of these numbers to form 4797? What forms should be used for 25% of depreciation recapture?
I am learning a lot from you. You are very good! thank you for your time!
Awesome! Very clear illustrations and explanations!
Thank you! Best explanation I have found! Appreciate this video!!!
Good vid,best explanation so far I have found. A few questions;
1. Sold rental in 2019. Rented for 10yrs, have both HUD statements..what do I do with my rental 1098 interest/insurance?
Is it a rental expense or 2nd home or add to basis?
2. If rental expense, can I add things that can't be added to the basis? Utilities, lawn care? Maintenance things awaiting a buyer or tenant
3. You mentioned claim improvement for life of rental? What about repairs made that was not added to depreciation? Dishwasher, new carpet?
Thank you
Question for you: My understanding is that you can deduct your annual depreciation amount from your annual rental income amount. If your annual depreciation amount is MORE than your rental income amount, is there a way for you to capture the difference as a tax benefit? If I only have one rental property and I continuously showed a net loss every year that I was renting it out prior to selling, would I be able to deduct the accumulated "loss" on my ordinary income?
And bonus question: How do individual states tax depreciation recapture upon sale of a rental property? (ie. California)
Excellent video, going through the example is very helpful. Thanks!
Great Content! Thank you 🙏🏽
Thank you Witness Richness for the feedback and kind words, I appreciate it!
Thank you for your video. You're the only one that has made me understand how this works. My question is: If you sell for a loss, do you still owe depreciation recapture?
This is a very valuable channel and you are a good teacher
I so love your a proxy in explaing smoothing so complex an making it I can understand it. Keep it up
Thank you, great explanation of unrecaptured capital gains.
Great video! Keep making them!!
Thank you Stewie!!
I was able to understand all you said but I wanted you to fill out forms so I could see what forms you would use.
Great video. Quick question. What if you lived in the property for a few years before renting it out? Would you calculate from the original purchase or from the time you moved out?
Thank you for your videos.
BEST explanation !!! Thanks...
This was broken down so good. Thanks
Wow just saw this so helpful! Thank you!
great content! thanks for making it and sharing!
if I understand correctly, depreciation recapture is basically turning in the tax return you claimed via depreciation in previous years in an aggregated way to pay it back to IRS, therefore the rate of it is different from long term capital gain.
what if, the owner of the rental property didn't claim depreciation in previous years? or depreciation in previous years does not bring generate any actual tax return? in those cases the schedule E ends up with a negative balance and how does that affect depreciation recapture?
That was an excellent video. Thank you.
Extremely impressed with this video. Love the energy. One question, i purchased my rental property on 11/01/2010 for 97,000. In the Asset Entry worksheet that’s the information I have since I started depreciating the property. I sold the property June 10, 2019. Do I now change that Cost Basis to reflect the improvements done to house and all the other costs you mentioned so the correct taxes are calculated? I am using Pro series basic edition Tax Software. The Cost Basis would be $91343 = 97,000 + 23000 (improvements) - 28,657 (depreciation). Thank you and please keep on bringing awesome videos like this. Learned a lot today.
Hello and thank you so much for your explanation. I have a question for you . I refinance my rental property with cash out option. Is my cost basis increased ?
Thx Brian. You are doing a great job. I lived in my property for 5 years and rented it out for less than a year. Now I am considering to sell, how would the costs calculation work out in that case?
So my question is if I'm depreciating upfits for my rental property, do I get to add that same cost back into my Cost basis? Seems like double dipping? Thanks
How do you go back and add an improvement I forgot to add before I rented our house. Do I have to amend the tax returns for the years rented or can you just catch it on the end when you sale the property? Thanks
Great video! Thank you! I now understand the whole picture but Im still confused on the improvement costs I can use. I thought just saving the receipts would work but it seems like that is not the case since i sent the money to someone to buy and pay people to do the rennovating. Someone told me I would need to issue a w-9 so a 1099-M can be issued so i can claim the improvement costs. Is this right track?
My question, if you sell your place and you lived in it 2 of the last 5 years, can you use depreciation on a yearly basis and avoid capital gains?
Thank you. This was very easy to follow. I do have a questions. I flipped a property but I held it for a year and four months. I did not rent it so do I still have the depreciation?
Very well explained. Thank you
Very clear presentation. But, can you let me know which IRS form I need to use to report the sale of my rental home (Form 4797, or 8949?) and use which IRS form to report the 25% tax of the depreciation capture? Thanks a lot. Sam
Thank you for the info. I do understand the process, but what I am not sure of is I originally lived in the property from May 2005 and started leasing the property in May of 2015 until this month. I am moving back into the property November 1st to fix it up and sell it. Do I still have to pay capital gain taxes?
Good morning Ryan !
Thank you so much for your excellent explanation. However, I have a question on depreciation part . If we never claimed any depreciation at all then we don’t have to pay for “ Un captured capital gain “ right ? Please advise. Thank you
I understand everything you said, good work. I do have one question! My rental property, I have never depreciated my property over 10 years of taxes as my cash flow works out perfect writing off expenses with tiny profit. Im in process of selling this rental property and can't figure out the depreciation recapture tax as I have never claimed it. IRS website section "Unrecaptured Section 1250 Gain" does not give any guidance when depreciation is not claimed. Any advice or even an IRS link would be very helpful!!!
Thanks! Very helpful! Do you also count closing costs for refinances? Both regular and cash out refi.
My home was a rental for 8 years, I lived in it for the first 4 months; then rented it. Moved back in as a primary residence for the past 18 months after tenants moved out. I have medical documentation for insomnia for over 10 years. Is my insomnia a qualifying medical/health exception for the partial of exclusion of 75% of the $250,000 capital gains tax exemption if I sell it now instead of waiting another 6 months to make the 2 years? I commute far to work, so at times I find falling asleep while driving, which is why I want to sell it now and buy another property closer to work.
It was really understandable! Thanks!
Question: is the accumulated depreciation amount that is taxable at 25% offset by any accumulated losses for my rental property I was not permitted to take in prior tax years?
Thanks a lot for the great video, this is very informative. Will the realtor commission expenses will fall under closing costs(Sale) ?
My big question is improvement. If I had to replace the gutters with a more modern design is that improvement? painting the exterior panels is improvement too? Putting new appliances is also improvement?
If you sold the property mid year- what do you do about the income/ expense you had during the couple of month you had the property? Do you still put the sold property on schedule E as usual?
Good video, I followed and understood the tax rate that you explained. My situation is, I bought the house in 1997, lived in it until 2010, when I rented it out until I just sold it this yr (2021). Can I claim all the improvements that I did right from the time I bought it? I did a lot of improvements when I lived there, new roof, pool remodel, windows, new AC, appliances etc. Can I add these costs to cost bases of the property? thanks
Thanks for the explanation. It’s very clear. My question is. Let’s say the cost basis and sale price was the same... even after all addition and subtraction for improvements and expenses etc. There was no capital gain.. but in fact if I held a rental property for 10 years, my loan has gone down by let’s say 50k which would be a profit for me. Do I need to pay tax on that gain?
Hi Y C, the loan balance in this situation would not affect the taxable gain.
Great video! Thank you!!!
thanks for your video, you explain it well, and easy to understand, like your video
Hi there, thanks for this great information. Do you have a video showing us the forms and where we put the figures? I'm not sure where and how the 25% is calculated vs the the 15% on the remainder of the depreciation?
Thank you so much for this excellent video! My taxes are usually quite straightforward but this year we sold a rental property. :/ My main question is do the tax rates (15% and 25% on recaptured depreciation) change yearly? Or can I use this equation for 2022?
Excellent presentation wish my cpa could have explained as well.
Question, in qb can you do your deposit of your ...cash to seller to zero out asset. How do you plug in the re-captured depreciation @25% and the long term capital gains rate of 15%.....or no ???? But how do you show on books ???
Thank you
Rob
How does depreciation recapture and capital gains / losses get impacted when selling an investment property in installments.
Really helpful accounting tips. Thanks Brian,
I have a question on long term rental property, please.
Could you aslo add yearly repairs expenses and attorney's fee to cost basics?
This is Very good Explanations. Thank you my brother...👍👍. God bless
Great info. I looked over my Schedule E for the 13 years I rented my property. As it turned out, 6 years the depreciation expense was not taken! Funny thing is that H&R Block did my taxes every year and would advertise about getting you EVERY deduction. So this is about $20,000 in expense never declared, so does that mean it actually will help me during the depreciation recapture?
Thanks for your video..How much tax or tax rate you need to pay for the mortgage that you took out that is over your cost basis?
Hello Brian, I'm trying to determine what constitute improvements. The rental property is located in a different state, and when the house is not being rented, I must improve lawn care to make it attractive to rent, can I deduct lawn care?
Pursuant to Regulation 1.1031(d)-2, would you add any liabilities assumed by the buyer to the sales price?
Hi, I love all your videos.
I’ve found this video catches my attention. So if I sell my long-term rental property for a profit of 40 thousand dollars, is this considered long-term capital gains? Or I still need to go with my tax rate?
Very informative! So basically, accumulated depreciation is taxed at 25% and the rest of the gain is taxed at 15%
25% for depreciation recapture rates. However, if you're making above ~$464K, then your long-term capital gains rates are 20% instead of 15%.
ClearValue Tax so I will still have to pay CA tax on capital gain? There’s no such thing as CA tax exemption on capital gain? What if I am 100% disabled military retiree? Does that make me exempt?
Can you prepare taxes on CA residents?
@@carpediem9718 Hi Carpe Diem, there are many benefits of such situation such as potential of property tax exemptions or paying no taxes on certain pension income in that situation, however, the capital gain income not connected with your service income will not be treated differently in this situation. And yes, we prepare tax returns from people all over country and even out of country.
Help! I lived in Property A for 7 years. (shown on my taxes as primary for over 7 years) Then on 8/1/2016 I turned it into a rental. On 7/31/2020, the current lease will be up and I want to sell it. Will I have to pay capital gains on it being that it was rented for 3 years and 364 days, almost 4 years? OR would it be best for me to do a 1041 exchange? I really do not want to do an exchange since in my area, it is a sellers market and the inventory is very slim.
Please advice
Thank you I do have a question. If the rental property was sold due to financial hardship in the covid years can you reduce the total of the depreciation deduction amounts? Is there a form to file...also does being in the military in the year 2021 a factor
Thank you. Is the payoff of the mortgage included on the sale closing cost figure as well?
Hello, when you mentioned add improvement into the cost basis, I have a concern, what about those improvements you have already claimed in the past, would that cause double dip?
Hi Tt Tt, no, because you add to cost basis the improvements and you also subtract the depreciation you've claimed on those improvements.
Hello, I love your videos! They are very informative. But I have a question, when selling a rental property how do I account for the outstanding loan on the property? Do I subtract the loan payout from the proceeds to arrive at the selling price for tax purposes?
During past 10 years we rented 33% of the home out. And with the improvements we got the 33% depreciation when filing the taxes during the year when the improvement was done. The property was sold last year. We are filing tax return now, the question is: Can we add the total cost of improvements to the cost basis or can we only add (100% - 33%) 67% of the improvement costs to the cost basis. Thank you very much in advance for your answers.
QUICK QUESTION. YOU ADD CLOSING COST ( BUYING AND SELLING) TO COST BASIS... CAN YOU ADD CLOSING COST IF YOU REFI LOAN.
SO IT WOULD BE CLOSING COST ( BUYING+SELLING+REFI?) + IMPROVEMENTS..... HELP.... GREAT VIDEO !!!
Thats my question. I refinanced my rental 2 times. So do I add those 2 plus the closing cost of the sell... for a total of 3 closings?
Did you ever find an answer?
At closing for initial purchase and/or refinance prepaid taxes and insurance are often collected for escrow. I assume these prepaids are NOT included in either the purchase price or refinance cost calculations. Correct?
thank you.. this was very helpful.
What if one makes several improvements to the property during the ownership period, BUT depreciates the improvements during the ownership. Do I add the full cost of the improvement to the basis and add all depreciation for improvements to the properties depreciation to get a total depreciation for recapture? Thanks
Thanks for the video! Great stuff. One question for you - how is depreciation recapture affected by/limited by operating losses? Say you rented a property for 1 year, had an operating loss on the rental of $30k including depreciation expense of $10k. If the entire $30k operating loss was unallowed would you still have to recapture the depreciation expense if you then sold it for a gain of say, $50k? Or do you only need to recapture depreciation expense that actually reduced your taxes paid in the years it was recorded? Thank you!
HI Shaun, they're in completely separate categories or "buckets". Let's pretend there's no expenses or income on the rental property except depreciation expense. Let's say depreciation expense is $10,000. You have a loss of $10,000 then (and let's say it accumulates until you sell it). When you sell your property, they don't net. You would recognize $10,000 ordinary losses and $10,000 of capital gains (at depreciation recapture rates [25%]). They are stated separately.
I've had 1 rental property for 33 years.. I doubt I could even find all the paperwork, and records.. so how the heck would I figure out how much I will owe for the sale of my property?
Similar situation here. The closing costs on purchasing isn't that much, especially compared to when selling. But, if you want to find out, I'd go to the county recorder's office and take a look at the deed, mortgage, release of mortgage, etc. on file. These documents may have the title company's information, which may be helpful. If you don't remember the purchase price exactly, the county appraiser (or recorder's office) may have the information.
You are very gifted in explaining complicated concepts in simple terms! Thank you!!! I have a question. If the depreciation will eventually come to bite me at 25% rate when I sell my home, is it better that I don't claim any depreciation throughout the years of renting my property out if my tax rate is below 25%?
You still have to pay it as if you claimed it even if you didn't claim it. The IRS doesn't care that you didn't claim it.
So lets say I am in a 30% tax bracket and I take depreciation on a rental property, am I saving 30% on my taxes (on the depreciated amount) or only 25%? In which case, will I be saving 5% by deferring my taxes?