Figuring the tax when
you sell rental property
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.
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.
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:
|Land value at purchase||$10,000|
|Selling price in 2002, net of closing
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.