Resources - Taxes

If you sold an income producing property after May 5, 2003, your gain will be taxed at the following capital gains rate. (please check the IRS tax codes for changes) For income property held more than one year, investors in a 25% or greater marginal tax bracket will be taxed at a 15% long term capital gains rate and a 25% recapture depreciation tax rate.

Investors in a 15% or lower marginal tax bracket will be taxed at a 5% long term capital gains rate and a 15% recapture-depreciation tax rate.

The total of all depreciation taken on the building during the period that you owned your income property plus all accumulated depreciation taken on any improvements to the buildings are subject to the recapture depreciation tax rates above.

For income property held less than one year, you will be taxed at ordinary income tax rates.

Example:

You bought an income property for $600,000 and held the property for 5-plus years. During that period, you claimed $100,000 in depreciation deductions before selling the property for $850,000. Your adjusted basis for the property is $600,000 minus $100,000 or $500,000. Your profit from the sale is $850,000 minus $500,000 or $350,000. If you are in a 28% tax bracket when you sell the property, the $100,000 portion of your gain attributable to depreciation will be taxed at 25%. The remaining $250,000 of gain will be taxed at the capital gains rate of 15%. Your capital gains tax on the sale would be $100,000 times .25 or $25,000 plus $250,000 times .15 or $37,500. For this example, you will owe the IRS capital gains taxes of $62,500 from the sale of your property.

For the above example, if you were in a 10% marginal tax bracket when you sold the property, you would owe the IRS $100,000 times .15 or $15,000 for the $100,000 of depreciation taken and $250,000 times a capital gains rate of .05 or $12,500 for the remaining $250,000 of gain for a total of $27,500.