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There are several different tax rates you will be confronted with at the sale of
a property.
The federal tax rate on appreciated Gain realized
is currently 15%. In addition, there is the state tax rate. Across the country
the state Capital Gains averages around 3-5%, and in California, for example,
all Capital Gains are taxed as ordinary income which can add another 9.3%. It
is important to know how your state works!
Also, if your current mortgage is in excess of your
adjusted tax basis, you have what is called
mortgage over basis. The difference between your current debt and
your adjusted tax basis is not taxed as a capital gain; rather it is taxed as
ordinary income at your ordinary tax income rate, (perhaps 34%) which can be a
big surprise. This is often the case if you have refinanced your property.
Finally, there is the depreciation recapture
which can catch you by surprise or be overlooked. If you depreciate an asset
like real estate, the depreciation that has been taken is recaptured at
a tax rate of 25%. Lets look at an example:
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Example: |
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Sale Price of Property |
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$500,000.00 |
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Cost Basis of Property |
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($100,000.00) |
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Capital Gain |
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$400,000.00 |
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Depreciation taken on $200,000.00 |
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Taxes Due*: |
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Federal |
15% |
$30,000.00 |
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Recapture |
25% |
$50,000.00 |
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State |
9.3% |
$37,200.00 |
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Total Tax: |
49.3% |
$117,200.00 |
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* Taxes may vary depending on your state of
residency |
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When you add these different tax rates
together the tax erosion can easily be 30% or greater.
There's the problem. |
