Nov
12
re: Capital gains tax on sale of commercial property?
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I own a Tenant-in-Common (TIC) interest in a com’l property.. The property is currently in the process of being sold after 5 years. My question is: We have paid down the mortgage over the 5 years about 60,000 with funds collected as TAXABLE rent. Now with the sale, I will recoup those funds. My CPA insists that this portion of the proceeds will be taxable… Being I’ve already paid tax on these funds, I don’t understand why I can’t get those fund back tax free and have to use them in a 1031 exchange (ps… I fully understand that the mortgage is a balance sheet item, but I still think I should get those $$ back tax free. Please HELP… thanks, Herb
Passive Income
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3 Comments
August 2nd, 2009 at 6:21 pm
You are forgetting depreciation, which you have been deducting each year. That is what will have to be recovered upon sale if you don’t do an exchange. If the property sells at a profit, that will be taxed as capital gain, but the depreciation is taxed at ordinary income rates not to exceed 25%.
August 3rd, 2009 at 12:05 pm
The amount of extra payments aren’t the true calculation of the gain . The profit of the sell, minus expenses like real estate commissions are used . In addition you will have to pay the recapture amount of the depreciation that was in excess of the allowable amount .
August 4th, 2009 at 3:56 am
The amount of debt on the property does not figure into the tax paid on the sale. Tax is figured on the difference of the selling price and the basis of the property.
However, the amount of cash you receive before taxes does of course depend on the debt on the property. And, $60,000 of the proceeds could be tax-free to you.
Example:
Sales price: $200,000
Basis: $100,000
Balance of Mortgage: $ 40,000
Cash proceeds: $160,000
Gain subject to tax: $100,000
Tax-free return of capital: $60,000.
So you do have a point that makes sense.
Now, the above is for a sale, not a 1031 exchange.
A 1031 exchange is an entirely different situation, and when you receive cash in such an exchange, that cash is first considered your gain, not a return of your capital, and you may have to pay tax on that.
So you may want to consider whether you want to sell out or do the exchange.