Question

You purchased a property three years ago with an original cost basis of $2.2 million. You determine that the land was worth $75,000 and the building could be depreciated over 39 years (use 1/39 per year). You plan to hold this property five more years and then sell it. What is your total capital gain and capital gain tax if your property is sold for $2,439,000 after holding for 5 years? Capital gains from price appreciation will be taxed at 15 percent and depreciation recapture will be taxed at 25 percent. Your ordinary income will be taxed at 36 percent.

Answer 1

Cost of property is = $2.2 million

Cost of land= $75000

Cost of building= 2200000-75000= $2,125,000

Property was purchased 3 years ago and to be hold for another 5 years, hence the depreciation will be = 2125000/8= $265,625

Adjusted cost = 2125000-265625= $1,859,375

Selling price= $2,439,000

Realized gain= 2,439,000 - 1,859,375-75000= $504,625

Capital gain= 504625-265625= $239,000

Capital gain tax= 0.15*239000= $35,850

Depreciation re-capture gain= $265,625

Depreciation recapture tax= 265625*.25= $66,406.25

Therefore, depreciation recapture amount= $ 66,406.25

This depreciation recapture amount is recorded as ordinary income.

Tax on ordinary income= 0.36*66406.25= $23,906.25