Calculating Capital Gain Taxes...
Many property owners are familiar with the "Terrible Ts" in real estate: termite, tenants and trash. Often the "Terrible Ts" become so burdensome that investors decide they want out of real estate all together. At that point however, investors become all too familiar with another "Terrible T" - Taxes!
In the state of California, property owners who decide to sell an investment property are subject to the following taxes on gain:
- 15% Federal Capital Gain Tax
- 9.3% State of California Tax
- 25% Federal Depreciation Recapture Tax
Calculating the tax bill upon the sale of a property isn't as hard as one might think, but it does require that you have a firm understanding of how much gain is in the property. The first thing to understand is how to calculate the Adjusted Basis:
Formula Example:
Net Purchase Price $ 500,000
(Depreciation) ( 100,000)
+ Capital Improvements + 25,000
Adjusted Basis $ 425,000
Once the Adjusted Basis is figured, calculating the Gain is easy:
Formula Example
Net Sales Price $ 1,000,000
(Adjusted Basis) ( 425,000)
Gain $ 575,000
With the gain calculated, tax computations are relatively simple.
Tax Formula
15% Federal Capital Gain 15% * (Gain- Depreciation)
9.3% CA State Tax 9.3%* Gain
25% Depreciation Recapture 25% * Depreciation
Tax
To defer the capital Gain tax liability investors have the option of conducting a 1031 Exchange.
For more information regarding 1031 Exchange process and referral to the reputable Exchange Company, please contact Victoria Wells at 415-710-4090 or email: vawells@comcast.net
Please be advised that this blog is not a substitute for professional tax or legal advice.
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Hi Virginia,
Great post! We have expanded the definition of the Terrible T's to include teanagers, toddlers, taxes, and now tenant turmoil!
You are so right, though. Many investors completely forget about the actual taxes, especially depreciation recapture taxes. They may not have equity, but they often have taxable gain!