Capital Gains Tax, Low Income, High Capital Gains
If I had low enough ordinary income to qualify for the 5% capital gains tax rate when I sell rental property, but the gain on the rental property was, say 75,000, will that gain bump me up to the 15% rate?
That is, does the amount of the capital gains itself get added in with income in determining the CG rate of 5 or 15%?
[ Edited by REISomerville on Date 09/01/2004 ][ Edited by REISomerville on Date 09/01/2004 ]
You may avoid any federal tax by claiming reduced gain exclusion. (However if you're ineligible for this privilege, your entire profit will indeed be taxed.)
It may not be as bad as you think - if you take the first step in calculating your taxable gain is to figure out your net sales price.
1. Subtract All Your Selling Costs from the Gross Sales Price.
You'll need a copy of your closing or settlement statement at hand to help you identify the costs involved in selling the property. But don't just assume that all costs on your closing statement can be considered selling costs.
Pull out any expenses. Your closing statement may include items that were prepaid by you, such as property taxes, insurance, or homeowner's association fees. It may also include items that remain unpaid by you as of the sale date, such as deposits or property management fees. These items are ordinary and necessary rental expenses that you should report as part of your rental income or loss on Schedule E rather than as part of your property sale.
After filtering out the rental items, add up all the selling costs; such as:
1 Commissions on the sale
2 Document recording costs
3 Legal fees related to the sale
4 Survey fees
5 Title fees or costs
6 Transfer fees
Now, subtract your total selling costs from your gross sales price. The result is your net sales price.
2. Subtract the Cost of the Property from the Net Sales Price.
To figure your profit, or taxable gain on the sale, you need to subtract the cost of the property from the net sales price. But, naturally, adding up all your costs can take a little work.
You need to know how much the property has cost you, starting way back when you bought it, and proceeding through time as you made improvements (costing your more money), or took deductions for depreciation over time (reducing your cost). The result is called your adjusted basis, because it has been heavily adjusted over time, and it forms the basis of any calculation of profit or loss. Subtract your adjusted basis in the property from the net sales price, to get your taxable gain.
As an investor it is vary imperative to get a professional account to guide and direct when it comes to taxes.