Question

Charles wants to relocate to Florida.  He decided to sell his rental property, which is located in Brooklyn, NY. Charles accepted the following terms:

Charles received $1,200,000 in cash and was relieved of $800,000 mortgage. (this was the outstanding balance at the time the transaction closed). Charles was responsible for broker's fees and legal costs associated with transferring the mortgage of $35,000 and $17,500, respectively.  

Charles' adjusted basis in the rental property is $600,000. (The $600,000 is net of $750,000 of accumulated depreciation expense. Calculate Charles' tax liability for this transaction?  Use the following information to calculate) (Depreciation recapture is 25% and L/T Capital Gain at 20%)

Answer 1

Original Cost		750000
Depreciation Deductions Written off		150000
Net Cost Basis		600000
Sale Prosceeds		1200000
Brokers Fee		-35000
Legal Costs		-17500
Net Sales Prosceeds		1147500
Net Profit on Sale of the Property		547500
Now, out of this total Capital gain of $ 547500, some Part will be taxed as per Depreciation Recapture, and the remaining of the Profit shall be taxed at the Tax Rate for Capital Gains.

Description		Capital Gain Amount	Tax Rate Applicable	Tax Amount
Depreciation Recapture		150000	25%	37500
Remaining Capital Gain Amount		397500	20%	79500
Total		547500		117000

In this concept, we need to understand, that in case of any asset where an assess has taken tax advantage in past years for the amount of depreciation, then he has to pay tax as per his normal applicable tax rates on the amount of depreciation already claimed in earlier years.

So, now, at the time of sale of the Asset, the Capital Gain is divided into 2 parts for the purpose of tax calculations. The amount of Capital Gain for Accumulated depreciations already claimed and for the remaining amount for the Capital Gains.