1. What is Capital Gains Tax on Rental Property?

When you sell a rental property, you may owe capital gains tax on the profit and must recapture depreciation deductions taken during ownership. The tax calculation combines long-term capital gains rates with a fixed 25% rate on depreciation recapture.

2. How Does the Calculator Work?

The calculator uses the following formula:

Where:

• \( Sale\ Price \) — Amount property sold for
• \( Basis \) — Original purchase price plus improvements, minus land value
• \( Depreciation\ Recapture \) — Total depreciation claimed during ownership
• \( Capital\ Gains\ Rate \) — Long-term capital gains rate (typically 15-20%)

Explanation: The formula separates the gain into two parts - the true capital gain (taxed at capital gains rates) and the depreciation recapture (taxed at 25%).

3. Importance of Accurate Tax Calculation

Details: Proper calculation helps with tax planning, estimated payments, and avoiding underpayment penalties. It also helps determine net proceeds from the sale.

4. Using the Calculator

Tips: Enter the sale price, your adjusted cost basis (purchase price + improvements - land value), total depreciation claimed, and your capital gains rate (typically 15-20% depending on income).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between capital gain and depreciation recapture?
A: Capital gain is the profit from price appreciation, while depreciation recapture "takes back" the tax benefits you received from annual depreciation deductions.

Q2: Can I avoid depreciation recapture tax?
A: Only through a 1031 exchange where you reinvest proceeds in another rental property, deferring all taxes.

Q3: How do I determine my adjusted cost basis?
A: Start with purchase price, add capital improvements, subtract land value (if separated), and subtract any casualty losses claimed.

Q4: What if my capital gains rate is 0%?
A: While some taxpayers qualify for 0% capital gains rate, depreciation recapture is still taxed at 25% regardless of income level.

Q5: Are there state taxes in addition to federal?
A: Most states impose additional capital gains taxes, which aren't included in this calculator's results.