New Capital Gain Tax Rates
I own a rent house which was purchased over 5 years ago and
qualifies for the new lower capital gains rate. I bought it
when I was single and it is separate property. I live in a
community property state and am thinking about selling the
house for a gain.
If I file a separate income tax return I would qualify for
the minimum capital gains tax rate, which I think is 8%. If
I file a joint return, is my capital gain tax rate
determined by the combined income tax rate of me and my
wife? If it is, I no longer would qualify for the minimum
capital gains rate. Do I have any other options?
The sale of a rental property can result in several
different types of income. In your situation, you have Sec.
1250 gain (taxed at a maximum of 25%) to the extent that
depreciation was allowed (or allowable) during the entire
time it was rented.
Any remaining gain would be taxed under Sec. 1231, which (in
absence of any previous Sec. 1231 losses that need to be
recaptured as ordinary income) would result in the same tax
bite as a long term capital gain (maximum rate 20%).
However, if you are also selling contents of the house
(furniture, appliances, etc.), part of the selling price
should be allocated to these, which would result in some
Sec. 1245 gain, taxed as ordinary income to the extent of
depreciation recapture, andSec. 1231 gain past that.
The reporting can be complicated, and you should plan on
getting local help with your return for this year.
You can file jointly or married filing separately.
In most cases, filing jointly won't cost you any more in tax
than filing separately (and may even result in a lower total
tax), and is obviously less complicated that filing two
returns as married filing separately.
I also caution you that the instructions for married filing
separate are very different than for any other filing
status. You have to be very careful to read every line of
instructions, to see what exceptions apply to that status.
Many tax benefits that apply to those in other status, such
as the earned income credit, rental passive activity loss
allowances, etc. do not apply if you are married filing
separately. It is very easy to make a mistake, and, if you
do, it can cost you interest and penalties added on.
Incidentally, if you live in a community property state, it
becomes even more complicated and professional assistance is
recommended.