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Minimizing capital gains on a property sale
Dear Tax Talk:
I've owned a piece of property for several years. I paid $80,000
for it, and it should sell now for about $290,000. I'd like to retire
and live on the sale money along with other money like savings,
401(k), etc. I'm now in my 60s. Will I be hit with big taxes when
I sell? Should I wait until I'm 65 to sell? Will I have to pay big
capital gains if I sell now, or will I have to pay later?
Thank you,
Herb
Dear Herb:
The sale of the property is a capital gain, and the maximum rate
on capital gains is 20 percent. The 20 percent rate will apply to
the gain from the $290,000 selling price less the original cost
of $80,000, meaning your tax on that portion will be $42,000. Of
course, any commission you pay for selling the property will reduce
your profit and your taxes.
You'll owe additional tax on the depreciation deductions
you've claimed on the original $80,000 cost. Depreciation that you've
claimed on the property is taxed for the most part at 25 percent
unless the property is nonresidential and was first depreciated
prior to 1986, in which case your tax on depreciation recapture
may be slightly higher.
In any case, your age will not change your tax costs.
What a lot of real property owners do to avoid paying
tax on the gain is borrow against the property. Since a lender will
give you 70 percent to 80 percent of the value of the property,
from a tax standpoint you're almost getting as much from the lender
as you would get after taxes, and, of course, you still have the
property.
-- Posted: Feb. 15, 2002
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