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Sale of Rental Property

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Level 1

Single senior citizen lady can no longer afford the upkeep of her 3-family rental (she occupied one unit). The sale took place in January 2020, so will be reported on her 2020 taxes next year. She acquired the property from her father for $1 in 1998. Her father had owned the property and lived in one unit since 1964. The rental portion was fully depreciated by the time this lady took ownership in 1998. There has been no depreciation taken since the time she acquired the property from her father (nor do I believe there would be any being she would assume the cost basis from when her father purchased the property and which was fully depreciated by 1998). I am of the understanding that 2/3rds of the property is long term capital gains  (15%) assuming the capital gains rates for 2020 are the same as for 2019. This would amount to ~ $50k in taxes excluding the amount of taxes owed to the State of New Jersey. Question: Am I correct that 2/3rds of the total sale price (less costs of sale) will be taxed at the long term capital gains rate?  She moved out of the 3 family when it was sold and is now renting an apartment. Am I overlooking anything that could reduce the tax burden? She is depending on the proceeds of the sale of this property to live on for the remainder of her retired life so I want to be sure she would need to pay this anticipated amount due of ~ $50k in federal income tax. I am informing her to make a first quarter estimated tax (July 15th)  based on this perceived amount of tax owed.

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Level 12

@wjk wrote:

She acquired the property from her father for $1 in 1998.

The rental portion was fully depreciated by the time this lady took ownership in 1998. 

There has been no depreciation taken since the time she acquired the property from her father (nor do I believe there would be any being she would assume the cost basis from when her father purchased the property and which was fully depreciated by 1998).

I am of the understanding that 2/3rds of the property is long term capital gains  (15%) assuming the capital gains rates for 2020 are the same as for 2019.


No, received it as a Gift in 1998.  As such, she received his Basis.  Even though it was fully depreciated, the land has a little Basis, so she gets whatever his Basis was in the land.

No depreciation since 1998?  So NO improvements in the last 27.5 years?  No roofs, furnace, AC, windows, or remodeling?  You really need to look into that (and then check if those improvements were wrongly written off as repairs).

It likely will NOT be long-term capital gains.  Due to the prior depreciation, it would be Unrecaptured Section 1250 Gain, which is taxed at her regular tax rate, up to 25%.  If I remember correctly, there may not be clear-cut guidance that the Unrecaptured Depreciation follows the Gift, but logic and principles would presume that follows the Gift.

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Highlighted
Level 12

@wjk wrote:

She acquired the property from her father for $1 in 1998.

The rental portion was fully depreciated by the time this lady took ownership in 1998. 

There has been no depreciation taken since the time she acquired the property from her father (nor do I believe there would be any being she would assume the cost basis from when her father purchased the property and which was fully depreciated by 1998).

I am of the understanding that 2/3rds of the property is long term capital gains  (15%) assuming the capital gains rates for 2020 are the same as for 2019.


No, received it as a Gift in 1998.  As such, she received his Basis.  Even though it was fully depreciated, the land has a little Basis, so she gets whatever his Basis was in the land.

No depreciation since 1998?  So NO improvements in the last 27.5 years?  No roofs, furnace, AC, windows, or remodeling?  You really need to look into that (and then check if those improvements were wrongly written off as repairs).

It likely will NOT be long-term capital gains.  Due to the prior depreciation, it would be Unrecaptured Section 1250 Gain, which is taxed at her regular tax rate, up to 25%.  If I remember correctly, there may not be clear-cut guidance that the Unrecaptured Depreciation follows the Gift, but logic and principles would presume that follows the Gift.

View solution in original post

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Level 1

Thank You -- For  including mention of : cost basis for Land, improvements since taken possession in 1998, and unrecaptured section 1250 gain -- all good and important points.

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