Figuring Uncle Sam's Cut on a Fourplex Sale

Dear Tax Talk, 

We have had a fourplex apartment building for seven years. We have someone who wants to buy it. If we clear approximately $275,000 on the sale, how would we be able to estimate how much capital gains tax we would have to pay for 2014? My husband is 67 and I'm 65. Our combined income for 2014 will be about $95,000. -- Nancy

Dear Nancy,

Figuring capital gains tax on the sale of your fourplex can be complex. The capital gains tax owed on the sale of rental property will have to be calculated by taking the amount realized from the sale, which is generally the gross sales price, and then deducting the selling expenses and the adjusted cost basis.

In addition, you have to take into consideration the fact that you may have to recapture as ordinary income a portion of the gain related to depreciation claimed in returns from prior years. Additionally, you might have to take into consideration claiming any "suspended losses" due to the passive activity loss rules. These losses would be beneficial for you in calculating the overall tax liability on the sale.

There is one other aspect to your tax situation that comes to mind: You need to be aware of the potential for being subject to the net investment income tax. This is an additional 3.8 percent tax on net investment income of individuals, estates and trusts that have income above certain threshold amounts, depending on their filing status. The net investment income tax went into effect beginning in January 2013.

The tax definitions of "adjusted basis," "depreciation recapture" and rules regarding "passive activity losses" are somewhat complicated. Unless you are very familiar with these concepts from other transactions over the years and how they are reported on your tax return, it may be a frustrating experience for you to try to report the sale on your own.

At this point, I hope I can persuade you to seek the advice of a professional tax preparer who can assist you in reporting this transaction on your tax return. There are multiple forms that are involved, including Form 4797, Sales of Business Property, and Schedule D, Capital Gains and Losses, etc. The benefits to you and your husband would be enormous, as this sounds like a sizable transaction. Please be aware that what you clear in dollars is not part of this calculation, although it is certainly important information to you as the seller.

Thanks for the great question and all the best to you on a successful sale.

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