Capital Gains Rate - Capital Gains Tax

If you sold an income producing property after May 5, 2003, your gain will be taxed at the following capita-gains rate.

For income property held more than one year, investors in a 25% or greater marginal tax bracket will be taxed at a 15% long term capital gains rate and a 25% recapture depreciation tax rate.

Investors in a 15% or lower marginal tax bracket will be taxed at a 5% long term capital gains rate and a 15% recapture-depreciation tax rate.

Recapture depreciation taxes work like this. The total of all depreciation taken on the building during the period that you owned your income property plus all accumulated depreciation taken on any improvements to the buildings are subject to the recapture depreciation tax rates above.

For income property held less than one year, you will be taxed at ordinary income tax rates.

Example:

You bought an income property for $600,000 and held the property for 5-plus years. During that period, you claimed $100,000 in depreciation deductions before selling the property for $850,000. Your adjusted basis for the property is $600,000 minus $100,000 or $500,000. Your profit from the sale is $850,000 minus $500,000 or $350,000. If you are in a 28% tax bracket when you sell the property, the $100,000 portion of your gain attributable to depreciation will be taxed at 25%. The remaining $250,000 of gain will be taxed at the capital gains rate of 15%. Your capital gains tax on the sale would be $100,000 times .25 or $25,000 plus $250,000 times .15 or $37,500. For this example, you will owe the IRS capital gains taxes of $62,500 from the sale of your property.

For the above example, if you were in a 10% marginal tax bracket when you sold the property, you would owe the IRS $100,000 times .15 or $15,000 for the $100,000 of depreciation taken and $250,000 times a capital gains rate of .05 or $12,500 for the remaining $250,000 of gain for a total of $27,500.

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Determine the Real Estate Financial Statistics for a Property

Before you buy an investment property it is critical that you create your own projection of the property's profitability. Real-Estate-Proforma.com has a quick-proforma with which you can calculate real estate financial statistics such as Internal Rate of Return, Capitalization Rate, Cash-on-Cash, Debt Multiplier, Loan-to -Value Ratio, Debt Coverage Ratio, and Mortgage Payments. You can use this JavaScript proforma to project the profitability of a real estate project. By becoming a member you will receive access to a number of Excel real estate proformas. membership | services

If you are analyzing another person's proforma, or you are examining a prospectus for a real estate deal, it is very important that you read the document carefully and determine how the values of the financial statistics above are being calculated. For instance, values such as the Cap Rate may be determined from overly optimistic projections of the future rental income of a property.

You can "reverse engineer" the financial projections you receive from a prospectus and/or request the Excel (or other type of) spreadsheet a developer used to create their proforma. A very useful Excel or Visual Basic macro used to check Excel formulas is available in the spreadsheet below for download. Download Mortgage Formula Excel Spreadsheet

The due-diligence you do on a potential investment may uncover a number of potential problems with a real estate deal and we suggest you research each real estate investment very carefully. There are a variety of real estate financial consultants who can help with this, but if you are like many Real-Estate-Proforma.com members, you can or are learning to do your own due-diligence.

We hope you become a more successful real estate investor by using this site! membership | services