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Figuring the tax when you sell rental property

George SaenzDear Tax Talk,
I have a relative who recently sold an old rental property, and we are wondering how her tax man will show this on her taxes next year. I determined it is submitted on Form 4797, but we are wondering if there is a way to determine what percent the Internal Revenue Service will take of the sale.

She owned the rental for many years, and owed no money. Does the IRS take money off the top, or is the amount determined at the time she files her return? Any help or reference you may suggest is most appreciated. -- A.K.

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Dear A.K.,
If you have a tax man, you shouldn't be wondering so much on how it'll be shown. You should be able to pick up the phone and ask him.

Actually, you should have asked him what the tax consequences would be prior to the sale, and he may have been able to suggest an alternative solution, such as borrowing or a like-kind exchange, depending on your friend's objectives. Contrary to popular belief, accountants continue to work after April 15 and we love to hear from our clients.

As your relative owned the property for many years, she's probably written off the cost (or at least should have) through depreciation. When the property is sold, the amount of depreciation (assuming this is less than her gain) claimed is taxed at most at 25 percent. The amount in excess of her original cost, if any, is long-term capital gain, taxed at most 20 percent. For example, assume the following:

Original cost$100,000
Year purchased1977
Land value at purchase$10,000
Depreciation claimed$90,000
Selling price in 2002, net of closing costs$250,000


Your relative would pay tax as follows:

Tax on depreciation (25 percent of $90,000) $22,500
Tax on gain above $100,000 (20 percent of $150,000)$30,000

Her total tax is $52,500. However, this number can vary if she doesn't have much other income or receives Social Security benefits that are otherwise not taxed.


-- Posted: June 13, 2002




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