"Mango Bar" <mangobar[at]adelphia.net> wrote:

- quote -

you are better than my situation. I have a rental property
which bought for $80K in 1985 and now $500K. I have to
figure out what to do with it in terms of tax..


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California now requires withholding of 3.3% of the GROSS
sales price at the time of sale. You get a form. And list
the withholding on your tax return, not forgetting to add it
on your Federal Schedule A as state tax paid during the
year.

After you figure your profit, you'll either owe more to
California, or get a refund. Just like any other state
withholding.

As to the rest, the depreciation is added back to your
profit and yes, living in the rental for 2 years will reduce
the taxable part EXCEPT for depreciation taken since May
1997.

Nan, EA in LA

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Mango Bar wrote:

- quote -

At least you're asking BEFORE selling the property, unlike
many posters....

- quote -

Generally long term (but see below for some restrictions).

- quote -

Now for the math (and I could easily be wrong about
some depreciation recapture for non-fixtures).

Step 1. Let B1 be the original basis of the property
in 1989 plus the cost of any improvements made between
1989 and 1993. Let B2 be the FMV of the property in 1993.

Your initial basis for gain is B1, while the basis for
loss is the lesser of B1 and B2. Each of these is carried
forward separately in further calculations. As it seems
likely you have an overall gain, this may not be necessary
even if B2 is less than B1, but I thought I'd bring it up.

Step 2. The final basis is obtained by adding the cost
of any improvements between 1993 and your sale, and
subtracting any depreciation allowed or allowable, and
adding in the selling agent's commission.

Step 2.

- quote -

(Assuming either B2> B1 or that profit > 0)

profit = sales price - origninal cost - agent fees -
additional improvements + depreciation

The depreciation component is taxed at a maximum of 25%,
while the remained is taxed at a maximum of 15%. (Depreciation
on non-structural components may be partially recaptured
as ordinary income, taxed at your normal tax rate. I need
to research this further, for my own tax situation.)

The tax rates for capital and ordinary gains are the
same for CA taxes, so this analysis doesn't mean
much for CA purposes -- although my recollection
is that the CA and Federal depreciation schedules
were different in 1993.

It should also be noted that you should have been calculating
Alternative Minimum Tax for both Federal and CA purposes, with
a slower depreciation schedule, and the (smaller) AMT gain
will need to be shown on the AMT schedules in the year of
sale.

(In other words, you need to calculate this "profit"
4 times.)

- quote -

In part -- depreciation since 5/6/97 is still taxed at
25%. (I haven't checked whether that's done by subtracting
that depreciation from the $250000 or if the entire $250000
is allowable in case the remaining profit still exceeds $250000.)

- quote -

Sell for less. <G
- quote -

Yes.

- quote -

Exchanging the property for another rental might defer the
gain -- but you'll need a 1031 exchange broker to handle
the details to make sure the sales proceeds never get
into your control.

- quote -

Yes. It's just CA withholding.

You would be exempt, under current law, if the
sale were COMPLETELY exempt under the $250000 rule, but
that cannot be. If you were to be a CA non-resident
at the time of the sale, there are some possible exemptions
from the withholding requirement. But, under the circumstances,
it appears that your withholding may be a low estimate of the
tax that would be due on the sale. A quick estimate would
be 9.3% of the "profit".

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I have a rental property that I am considering selling and
would like to figure out what my tax liability is going to
be before proceeding. I purchased the home in 1989 and have
been renting it since 1993. It has more than doubled in
price.

- Will the profit I make be treated long term capital gain?
Or as short term capital gain/ordinary income? If long term,
what is the percentage?

- How does the sched E rental property deductions
(depreciation, maintenance, property taxes etc) that I have
taken since 1993 come into play in determining the tax
liability?

- Will I need to add the tax benefits from the deductions to
the profit figure?

- Is this how the profit is calculated?

profit = sales price - original cost + deduction benefits -
agent fees

- Does taking up residence there for 2 years remove the tax
liability for profit less than $250000?

- Are there any other ways to lessen the tax liability?

- Can capital losses from stocks be used to offset the gains from
the rental home sale?

- Would purchasing another rental property help?

- I heard mention about a 3% CA tax of the gross withheld at
the time of sale. I assume that this is not in addition to
tax liability from above. Is this correct?

Thanks in advance for any help you can provide.

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