At this point, you’d have the value of the building plus all those improvements that added to your basis. Then over the years you would have run the building and should have taken a tax benefit on your income tax return for the building’s depreciation.
You need to figure out how much depreciation you took on your tax returns over the years. The IRS will require you to repay 25% of the depreciation. Here’s an example of how this works: If you took depreciation of $100,000 over the 11 years, you’d now owe the IRS $25,000.
Next, you have to calculate any profit on the sale of the building. Let’s assume the basis for the building is $300,000 and you sold the building for $500,000. In this example, you’d have long term capital gains of $200,000. The current long-term capital gains tax rate ranges from 0% to 20%.
According to IRS.gov, if you’re filing for 2021 (by April 18, 2022), married couples filing jointly won’t pay any capital gains tax if their total taxable income is $80,800 or less. The rate jumps to 15% on capital gains, if their income is $80,801 – $501,600. If your income is above that, you’d pay 20% of the gain, or in our example $40,000 in long-term capital gains tax.
Assuming you fall into the 20% bracket, between the two taxes, you’d end up paying about $65,000 plus an additional tax of 3.8% on the sale of investment property.
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