tax

Capital gains on rental

George Saenzq_v2.gifDear Tax Talk,
My question is about how to plan for the amount of capital gains tax that we will need to pay when we file our 2008 taxes on a rental property. I also need clarification if I need to pay an estimated tax this year before we file for 2008. We bought our house in December 1985 for $69,000 and sold it in February 2008 for $239,000. We lived in the house from December 1985 to May 1997 and rented the upstairs apartment only.

In May 1997 we rented the upstairs apartment and the first floor apartment for about 10 years. We did max out depreciation, so my husband says we will most likely be paying capital gains on all of it. We are in a lower tax bracket, and in 2007 and the years prior to 1998, we always got a portion of our taxes back each year.

I am anxious to make sure that we put aside enough of the sales proceeds before we pay off certain debt and do major much-needed improvements on our current home. Also, do I need to start sending in an estimated tax payment? I thought that I read that if you didn't pay any taxes last year, you were exempt from having to do the estimated tax payments. Any light you can shed on this situation would be greatly appreciated!
-- Bowers

a_v2.gifDear Bowers,
Technically you shouldn't have maxed out your depreciation deductions, so you should still have basis in the property that you sold. The bottom apartment should have been depreciated over 27½ years, not 10, and you should have made an allocation to land that should not have been depreciated. If you overdepreciated by ignoring these rules, you would be required to reduce your $69,000 basis in the property by the actual depreciation claimed.

It's hard to give you an exact estimate of the tax on the sale without knowing all your other income. If I assume you have $30,000 in other income and all of the $239,000 from the sale of the property is gain, including $69,000 in depreciation recapture, you can figure approximately $47,000 in taxes for 2008.

You read right: If you didn't pay any taxes in 2007, you don't have to pay estimated taxes for 2008. You won't be assessed a penalty if you pay your 2008 taxes when you file your return in April 2009.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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