Land vs House Value when selling a Rental Property

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RetiredTrvl
Posts: 19
Joined: Tue Dec 26, 2017 11:44 pm

Land vs House Value when selling a Rental Property

Post by RetiredTrvl » Tue Jun 11, 2019 1:47 pm

Would appreciate some feedback on how the value of the land versus the value of the house affects the taxes owed on the sale of a rental property.

Say, at the time of the sale, the land is worth 20% and the house is worth 80% of the total value.

Original purchase price $100,000 - land is valued at 10,000, house at 90,000 (so 90K is used for calculating depreciation)

Depreciation taken = 50K so basis for house becomes 90K - 50K = 40K

Sold for $150,000 - land is valued at $30,000, house at $120,000

Gain on land is 30K - 10K - 2K closing costs = 18K
Gain on house = 120K - 40K = 60K less 8K closing costs and 5K in repairs = 47K

If the gain on the house is only 47K, is this the amount that I pay 25% depreciation recapture taxes on or does the value of the house alone not come into it at the time of sale (only at the time of purchase to determine depreciation)?

If the value of the house and land are not considered separately then I guess the numbers would be:

Adjusted basis 100K - 50K = 50K
150K - 50K + 10K closing costs + 5K repairs = 85K gain of which 50K would be taxed at 25% for depreciation recapture and 35K capital gains

Can someone tell me which scenario is correct (assuming one of them is!). I knew someone who sold a rental property and their accountant asked them to find the value of land that sold in the area at the same time their rental sold. Using the increased value of the land, the accountant was able to reduce the gain attributable to the house and this in some way reduced the taxes due.

fabdog
Posts: 581
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Land vs House Value when selling a Rental Property

Post by fabdog » Tue Jun 11, 2019 2:29 pm

The land will get reported separately on form 4797 from the building (land section I, building Section III)

Part III on the sale of the building will determine how much depreciation recapture and any other ordinary income. So depending on how much depreciation you had claimed vs what you have for price vs your remaining basis, this may help you, or it may not

If you have turbo tax you can run your numbers through and see how it comes out. If you have been depreciating based on the $90K original estimate it should give you a reasonable answer

Mike

Topic Author
RetiredTrvl
Posts: 19
Joined: Tue Dec 26, 2017 11:44 pm

Re: Land vs House Value when selling a Rental Property

Post by RetiredTrvl » Tue Jun 11, 2019 2:35 pm

Thanks Mike. I'll check out form 4797.

I'll be getting Turbotax to do my 2019 taxes I'll follow your suggestion and run the numbers before I attempt the actual sale next year.

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