Hey folks! Joe Libin at Latitude Lending here in Salt Lake City back with you. Welcome to this month’s Inside Track. You know, as one of Salt Lake City’s top mortgage brokers, I get a lot of questions about folks with rental properties and businesses and things like that. I own some rental properties. Some of you watching this might own some rental properties too. Wanted to share this with you that I got from my CPA, Haney and Company. They do such a great job and this affected me a couple of years back. And this came out. So I wanted to share it with you. If you’re looking to sell a rental property, well, business rental property or any large asset, you really got to focus on the tax consequences, right? So the point of this is that the tax consequences, you know, they can be huge and it’s not very simple.
With respect to rental property, we sold a rental property a few years back. Me and some partners, we wanted to get ahead of this because we knew it would be an issue and very, very happy that we did because we all understand, you know, capital gains, taxes, capital gains being 15 to 20%, depending on how much money you make and things like that. But the real kicker is the depreciation recapture. So, when you own a property, a rental property and you report it on your Schedule E, typically what happens is you depreciate the property over a 27 and a half year schedule. Well, where this comes back to bite you in the butt is that they recapture that depreciation when you sell the property. Assuming you don’t exchange it through a 1031 exchange. And this depreciation recapture can really throw people off. So, I wanted to show this quick example that they gave because it’s kind of fantastic. Let’s say you purchased a rental property 10 years ago for 300 grand. And 50,000 of it went to the land. You don’t depreciate the dirt under the property, just the sticks and the bricks, right? So, you have 250,000 to the building, right? And again, you depreciate that over 27 and a half years. So, that goes over gives you about a $9,100 a month depreciation. So, over 10 years, when you go to sell the property, you’ve actually depreciated $91,000. That’s what they’re going to recapture.
So, the way that pans out down here is $91,000. $91,000 of un, recaptured gain for the depreciation you took is going to be taxed at a maximum of 25%. It might be 20%, but you’ve got to kind of factor that in. And then, so you have $100,000 of uncaptured remaining of the long-term capital gain because you sold it at a profit. That’s going to get taxed at the normal capital gains of 15 to 20%. So, when you kind of go through the math on this, and sorry, I didn’t warn you, there’s going to be math, on the $91,000 of recapture, that works out to be an extra $22,750 in taxes that maybe you weren’t planning on getting. So, here’s the point. There is a point. The case for a, a pre-transaction conversation, if you’re going to sell a product. Please consult with your tax advisor ahead of time. You’ve heard me say that several times, but you want to get with these folks ahead of time.
What we ended up doing was taking and running this by our tax advisor, Haney, and then putting a, he gave us a ballpark of what it looks like would be. And then we put that money away because that wasn’t our money to keep. That was the money that was going to have to go to the IRS. We then sold the property. I took the hit for the tax bill, but we had that money set aside so that we were able, me and my partners, able just to keep the profits for ourselves and not, you know, get hit with a brick in the side of the head with a tax gain. We already have that taken care of. So anyway, if you made it this far, thank you so much for watching.
If you have questions about this or anything else, you know, I’m never too busy to help. So reach out to me, my contact number’s below. Thanks so much and we’ll talk to you soon. Take care.
Joe Libin: +1 801-209-5205
