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William Perez

Selling Rental Properties

By June 30, 2006

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Today's tax question comes from I. Marsh in Wisconsin. She asks:

"Are there Capital Gains to be paid if a person who sells his rental property (after owning it for 8 years) is 77 years old?"

Rental properties follow different rules for calculating gain and loss compared to the capital gain treatment for a primary residence. Your adjusted basis in the building is the purchase price minus depreciation you have taken as a deduction on your tax returns, plus any improvements. (You can find a more detailed equation in my article on rental properties).

Since your basis was reduced by the depreciation, your gains are higher. And so your gains are split into two different categories: capital gains on the appreciation in value of the property, and ordinary gains on accumulated depreciation that you must recapture. In Publication 946 the IRS explains the issue of When Must You Recapture the Deduction?

Since you held the property for eight years, the capital gain portion will be taxed at long-term capital gains tax rates. The depreciation recapture will be taxed at your marginal tax rate. The depreciation recapture is treated just like other income, and you can minimize the tax bite by using traditional tax planning methods, such as taking the standard deduction or itemized deductions, personal exemptions, and tax credits.

Anyone selling rental property should hire an experienced tax professional to help them calculate their gains and prepare their tax return.

Do you have a tax question? Visit the Tax Forum.

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