tax consequences of selling rental property

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bettykayWAAZ
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Joined: Fri Jan 16, 2009 11:26 am

tax consequences of selling rental property

Post by bettykayWAAZ »

No real question here, just FYI for people selling rental property.
Although, if someone sees something amiss in what I've said, please tell me.

I recently sold a 4-plex that my husband and I had owned for 11 years. I read on the internet that we would have to payback 25% of the depreciation we had taken and that capital gains tax was 15% for most people. I fine tune these calculations by entering 2017 numbers into my 2016 software. Here are some tax insights for people who own rental property or are thinking for buying rental property. It is followed by some specific tax info that maybe of interest to those who do their own taxes. Then some hindsights.

1) The entire depreciation plus the capital gains are added to our income, which puts us into AMT territory. This means we lose our $4,050 exemption (each), can’t do schedule A, pay capital gains of 20%, and have an additional $8,000+ tax on line 45 (alternative minimum tax).
2) I read in my Part D Medicare document that my premiums will be increases (doubled) because we are high income. I assume my Medicare payments will increase also. (note: there is a 2-year lookback, so this increase will happen 2019 for us, and should only last for one year).
3) Just in case you didn’t know, you will be charged this depreciation, even if you didn’t take advantage of the deduction while you owned the property. You might as well take it.

For DIY tax filers:

The first time I entered the numbers I added the 1099-B for the sale price of the property AND filled out an unnumbered form “sale of business property.” My tax was much higher than expected. I then saw that I was charge twice for the gain on the property. I hadn’t realized that the building (and other depreciated items) should be reported separately from the land. There are two ways to do this.

a. Below the 1099-B form (in my software) there is the ability to “adjust” line 1d “proceeds” by the amount of the building/etc. I used code ”O” for other. This left only the value of the land on 1099-B, which flows through to form 4749. The building/etc goes on “sale of business property” and flows through to form 8949 (Sale of Depreciable Assets).
b. You can “adjust” away all the proceeds and add the land to the list of items depreciated (and not depreciate the land).

The results seem to be the same with both methods. I will verify that when I get the 2017 version of the software.

Note: I did not fill out form 8949. I went to dialogue section of the software for the depreciation of the building/etc and said that I’d sold the building and each item. The depreciation information then flowed through to “sale of business property” where I added the sale price. I set the sale price of each “item” so that gain was 0. I then set the sales price of the building itself so that the total of all the sale prices came to the original number on the 1099B. All of this then flowed through to form 8949.

Hindsight:

While we have ended up with a good chunk of money, there are some things that we might have done differently:

If we’d waited until after DH retired to sell the property, our total income for the year would have been less, and the taxes would have been much less. He wasn’t willing to retired until he knew that we had the proceeds to live on, which I understand.

Too bad we bought at the height of the real estate boom, the year before the bust.

We borrowed money from our home, for the down payment on the building. This hurt our cash flow and reduced my IRAs.

We weren’t as aggressive as we might have been with rent increases. This hurt both cash flow and selling price.

I could have entered this as a reply to
viewtopic.php?t=216932 Need Urgent help in Capital Gains Calculations
or viewtopic.php?f=1&t=230674&newpost=3589 ... ead#unread Should I sell rental property before I would have to pay taxes on capital gains?
if the moderator thinks it should be there, please move it.

P.S. I use TaxAct. Their HELP didn't lead me to the "insights" #1, above, but once I figured that out, the software worked well. I'm not likely to change, because I have eleven years worth of depreciation already entered.
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