Another Capital Gains Tax Question
when they tax you on capital gains, do they deduct the amount that you actually put down on the house? also, how do you find out the depreciation? the house is only 2 years old. 
when they tax you on capital gains, do they deduct the amount that you actually put down on the house? also, how do you find out the depreciation? the house is only 2 years old.
The IRS will tax the difference between the basis and the sell price less real estate commisions. The basis is the purchase price plus improvements less depreciation. So if you purchased the house for $100,000 and had it for two years, and sold it for $150,000, the gain could be as follows:
Sell Price: $150,000
less commission - 7,500
less Closing cost - 3,000
Net Sell Price $139,500
Purchase price $100,000
Add improvements + $5,000
less Deprecaition - $6,890
Net Basis $98,110
CApital Gains $41,390
Tax could be 15% of $41,390 or $6,208.50.
In order to find the deprecaition, you take the purchase price less 10-15% land and divide it by 27.5. This is the amount of depreciation you can take per year.
Is this house your primary residence? If so, have you owned AND occupied it as your primary residence at least two years before you sold it?
If the answer to both questions is yes, then the first $250K of profit per eligible taxpayer is exempt from capital gains taxes. If your sale profit is greater than $250K per eligible taxpayer, then capital gains rules apply to the amount of your profit that exceeds $250K.
If the property is a second home (e.g., a vacation home), then your profit is taxable as a capital gain. Depreciation is not a factor because depreciation is not allowed for your primary residence, or for your second home.
If the property is an investment rental property that you have owned for two years, then you should have been taking a depreciation expense during your holding period. The amount of depreciation allowed (that you should have taken) is recaptured at a 25% tax rate when you sell. The rest of your profit is taxed at a maximum long term capital gain rate of 15%. If you have not taken any depreciation, there are IRS depreciation tables that will tell you how to compute the depreciation that you should have taken.
In all cases, your downpayment and your mortgage loan balance are irrelevant to the tax calculations. Your taxable profit is the difference between your net sale proceeds and your adjusted cost basis.
[ Edited by NewKidinTown on Date 07/16/2004 ]