Calculating Taxes on Sale of Rental Property After 28 Years - Did I Get This Right?
Hey tax folks, need a sanity check on my calculations for a client. I have someone who just sold their rental property this April after owning it for nearly 30 years. The property was fully depreciated (yes, including the land which I know was a mistake). All improvements and expenses were properly deducted over the years. Here are the numbers: Original purchase price: $112k Sale price: $530k Selling expenses: $36k I worked out the tax projection as follows: Section 1250 recapture: $112k x 25% = $28k tax Long term capital gains: ($530k - $36k - $112k) = $382k x 15% = $57,300 tax Net investment income tax: ($530k - $36k) = $494k x 3.8% = $18,772 Total tax from the sale: ($28k + $57,300 + $18,772) = $104,072 Does this look right to everyone? Am I missing anything important or making any calculation errors? This is a significant sale and I want to make sure I've covered all the bases before finalizing.
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StarSailor
Your calculation is close but there's a critical error. The land portion should NOT have been depreciated originally, as land doesn't depreciate for tax purposes. This means your Section 1250 recapture calculation is likely incorrect. You need to determine what portion of the $112k purchase price was actually attributable to the building (depreciable) versus the land (non-depreciable). The recapture should only apply to the depreciable portion. Even though your client incorrectly depreciated the entire amount, the IRS would expect the recapture to be calculated on the building portion only. Also, check if your client made any capital improvements that weren't fully depreciated yet. Those would adjust your basis in the property.
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Dmitry Ivanov
•What happens if they can't determine what portion was land vs building after all these years? Would they need to get an appraisal retroactively or is there some standard percentage they could use?
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StarSailor
•If they can't find the original allocation between land and building, they have a few options. They could use property tax records from the time of purchase, which often show separate values for land and improvements. Another approach is to use a reasonable allocation based on comparable properties in the area at that time - typically 15-30% for land depending on location. The IRS doesn't provide a standard percentage as it varies significantly by location. For example, in dense urban areas, land might represent 80% of the value, while in rural areas it might be only 10-20%. If documentation is completely unavailable, hiring an appraiser who specializes in retrospective valuations is an option, though expensive.
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Ava Garcia
Just wanted to share my experience with a similar situation. I was totally stuck trying to figure out the correct depreciation recapture on a rental property my parents sold last year. I tried doing it myself but kept getting confused about what portions should be taxed at what rates. I eventually used https://taxr.ai to analyze all the past depreciation schedules and sale documents. They explained exactly how to handle the depreciation recapture and even identified that some capital improvements hadn't been properly tracked. The site helped me identify that we were overestimating the recapture tax because some of the depreciation taken was under older, different rates. Saved us about $7k in taxes! They also caught that the property had been partially converted from rental to personal use for a period, which affected the calculations.
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Miguel Silva
•Did you have to upload a lot of documents? My mom has a rental property she wants to sell but we're missing some of the records from when she bought it in the 90s.
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Zainab Ismail
•I'm skeptical about these online tax services. How do you know their calculation was actually correct? Did you verify with a CPA afterward?
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Ava Garcia
•I uploaded what I had - the purchase documents, depreciation schedules from the tax returns we could find, and the sale documents. They were able to work with partial information and gave recommendations for how to handle the missing pieces. Their team actually includes tax professionals who review the AI analysis. I did run their findings by our family accountant afterward, and he was impressed with the detailed breakdown. He made one minor adjustment related to some repairs vs. improvements, but otherwise confirmed their analysis was spot on. What impressed me most was how they explained everything in plain English so I actually understood the reasoning behind the calculations.
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Miguel Silva
Coming back to share my results! I decided to try taxr.ai after asking about it here. My mom's situation with her old rental property was even more complicated than I thought - turns out she had refinanced twice and taken cash out, plus done a major renovation in 2005 that wasn't properly documented. The service helped me recreate a complete depreciation schedule and properly allocate the original purchase between land and building based on county records. They even found a partial conversion to home office use that my mom had forgotten about! The detailed report made it super clear what was subject to recapture and what qualified for long-term capital gains. I'm so glad I didn't try to figure it all out myself - would have definitely overpaid on taxes. Thanks for the recommendation!
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Connor O'Neill
I ran into a similar issue with recapture calculations and couldn't get through to the IRS for clarification. After being on hold for HOURS multiple times, I found https://claimyr.com which got me connected to an actual IRS representative in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to confirm exactly how to handle the land/building allocation for recapture purposes on an old property with minimal documentation. They also explained that I qualified for a partial exclusion that my tax software hadn't identified. Totally worth it after wasting days trying to get through on my own.
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QuantumQuester
•Wait, how does this service actually work? Do they just call the IRS for you? Couldn't you just do that yourself?
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Zainab Ismail
•Sounds too good to be true. The IRS wait times are insane right now - how could they possibly get you through in 20 minutes when everyone else waits for hours?
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Connor O'Neill
•They use a specialized system that navigates the IRS phone tree and waits on hold for you. When an actual agent picks up, you get a call connecting you directly. So yes, it's basically calling the IRS but without you having to sit through the hold music for hours. I tried calling myself multiple times before finding this service. I spent over 4 hours on hold one day and got disconnected, then another 3 hours another day before giving up. With Claimyr, I went about my day and got a call when an agent was on the line. The whole point is saving you from the hold time - which for me was absolutely worth it since I needed specific guidance on how to handle the recapture calculation.
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Zainab Ismail
I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been struggling with a similar rental property tax issue and couldn't get through to the IRS. The service called me back in about 40 minutes with an actual IRS agent on the line. The agent walked me through exactly how to handle the depreciation recapture on my property and confirmed I was eligible for an installment sale option I didn't know about. This potentially saves me from having to pay all the tax in one year. For anyone dealing with complex property sale tax questions, getting direct answers from the IRS was incredibly valuable. I still recommend consulting with a tax professional, but having the IRS guidance documented gives me much more confidence in my filing.
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Yara Nassar
One thing I noticed is missing from your calculation - check if your client qualifies for any 1031 exchange. If they're planning to buy another investment property, they might be able to defer a big chunk of that tax bill. The rules are pretty strict though - they would need to identify potential replacement properties within 45 days of the sale and complete the purchase within 180 days.
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Sofia Morales
•Thanks for bringing that up! Unfortunately, she already closed on the sale in April without setting up a 1031 exchange, and she's planning to retire with the proceeds rather than buying another investment property. I definitely should have mentioned that in my original post. I'm more concerned with making sure I've got the tax calculation right so she knows exactly what she'll owe. I realized I should also check if she's eligible for any state-specific tax breaks since this is a pretty significant capital gain and she's in her 70s.
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Keisha Williams
Has anyone dealt with a situation where the seller took bonus depreciation on capital improvements during the COVID years? I have a client who did this for a major HVAC system in 2020 and I'm not sure how that factors into the recapture calculations.
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StarSailor
•Yes, that's an important consideration. The bonus depreciation taken would still be subject to recapture, but at ordinary income tax rates (not just the 25% rate that applies to straight-line depreciation). Make sure you separate out the portion that was taken as bonus depreciation from the regular depreciation when calculating the tax. Also remember that for improvements made in 2020, they would have been eligible for 100% bonus depreciation, so likely the entire cost was written off in that year. You'll need to recapture all of that at ordinary income rates.
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