However, if you are in a 15% or lower marginal tax rate, the capital gains that you realize from the sale of an income property is added to your income to determine the capital gains rate that will be applied to your gain.  That portion of your gain which is in a 15% tax bracket ( after adding the capital gains amount ) will be taxed at the lower capital gains rate and that portion of your capital gains that is in a 25 % tax bracket ( after adding the capital gains amount ) will be taxed at the 15% capital gains rate.  Approximately 75% of the tax filing population are in a 15% tax bracket.  This tax change will therefore impact many real estate investors when they sell income property.  If you are in a 15% tax bracket and are considering selling an income property, be sure to go over how your gains will be taxed with your tax adviser.

Unrecapture depreciation taxes work like this.  The total of all depreciation taken on the building during the period that you own your income property plus all accumulated depreciation taken on any improvements to the buildings are subject to the unrecapture depreciation tax rates above.

You are single with an income of 20,650.  The 2006 cut off for the 15% tax bracket is 30,650.  You sell a stock that you held for more than 1 year in 2006 with an 80,000 gain.  In the above example, an 80,000 gain on a stock transaction would be taxed like this. You would pay 5% on the first 10,000 of gain and 15% on the remaining 70,000 of gain for a total of 11,000. 

Capital Gains Rate Example for tax payers in a 25% or greater tax bracket:

You bought an income property for $500,000 and held the property for 5 plus years.  During that period, you claimed $100,000 in depreciation deductions before selling the property for $750,000.  Your adjusted basis for the property is $500,000 minus $100,000 or $400,000.  Your profit from the sale is $750,000 minus $400.000 or $350,000.  If you are in a 28% tax bracket when you sell the property, the $100,000 portion of your gain attributabl 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.

Note that if you paid a sales commission on the sale of your income property, your gain or profit from the sale would be reduced by the amount of the sales commission.

For income property held less than one year, you will be taxed at ordinary income tax rates.  To determine at what capital gains rate your income property sale will be taxed at, click on the link below to locate your marginal income tax rate.   Income Tax Table

The On Target real estate investment software applies your capital gains rate and unrecapture depreciation tax rate to the proceeds from sale on the Sale of Property report.  To order On Target for just $97.95 click on   Purchase Software   To learn more about the On Target software, go to  Software Features  . The On Target real estate software includes a 30 day money back guarantee and free support.

                              © Copyright 2000 - 2010 Advantage Software LLC