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Dear 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
Dear 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.
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