If I sell my rental condo will I have to pay captitol gains tax?

Question

I lived in the condo 2 years prior to renting it for the last four.
My gains on the property are roughly 75000. If I do have to pay does anybody have a rough idea of the percentage or amount i would be taxed?

Answer 1

If you lived there 2 of the last 5 years you'd have a 250K tax break (if only you'd sold it a year ago). Since that is not the case you will have to pay long term capital gains tax on the sale. That is taxed at a 15% rate.

Of course you could move back in for 2 years and sell it then, if you really wanted to avoid all tax.

Answer 2

Since you did not live in the home for at least 2 full years out of the 5 years immediately prior to the sale you would not be eligible for the exclusion on the gain of a principal residence.

You gain will be based upon the net proceeds from the sale and your adjusted basis. The net proceeds is pretty straight forward so I won't delve into that, but your basis gets a bit complex since you rented out the home. You start with your purchase price and add any non-recurring closing costs. That's your basis. Now you add the cost of any improvements, if any. Finally you must SUBTRACT the depreciation that you claimed while renting it out. If you did not claim any depreciation, you still must subtract an amount equal to the depreciation that would have been allowed had you claimed it. This will give you your adjusted basis. Subtract that from the net proceeds from the sale to arrive at your gain.

Now that you have your gain, you must figure the capital gains tax. Since you owned it for over 1 full year it's a long-term capital gain and is taxed at a lower rate. If your tax bracket is higher than 15%, the rate is 15%. If your tax bracket is 15% or less, the rate is 5%.

Here's an example:

Net proceeds: $175,000
Purchase price: $90,000
Improvements: $10,000
Depreciation allowed or allowable: $12,000

Your adjusted basis is $90,000 + $10,000 - $12,000 = $88,000.

Your gain is $175,000 - $88,000 = $87,000.

Your tax is $13,050 if your bracket is 25% or higher. If your bracket is 15% or lower, the tax is $4,350.