“Bob, I’m selling my condo and should pocket $20k after paying off the mortgage. How much tax will I owe on the $20k? Just to provide specifics, I bought the condo at the top of the market for $135k and the sales price is $132k so would it be -$3k, even though I pocket $20k? Thank you!”
I receive emails like this from clients with rental properties on a regular basis. With this client it is helpful to know that she files her 1040 as married filing separately, but lives with her husband. This means that she has not been able to claim up to $25,000/year in losses from renting out her condo. Here is my response:
Client,
It’s great to hear from you and congratulations on the sale. Few things are straightforward when it comes to taxes and this condo sale is a prime example. The condo was purchased for $135,000 six years ago, but by the end of this year will have $29,455 in depreciation claimed against it. This brings the cost basis down to $105,545. The sales price is $132,000, but there is probably going to be a commission of ~$8000 on that bringing the sale price for tax calculations down to $124,000. This produces a long term capital gain of $18,455.
But there is good news! You have a carryforward loss of $31,101 from the condo that you have not been able to claim because of your filing status. Upon the sale of the condo, that loss can be claimed. That produces a net capital loss of $12,646. That can be carried forward and will be applied against any capital gains that you may have and $1500 per year of it can be applied against your ordinary income. The loss will carryforward to future years until it is used up.
Hope this helps,
Bob
