Everyone breathed a sigh of relief when the tax cuts were extended at the end of last year for another two years. Although it is good for real estate investors that the maximum federal capital gains rate will remain at 15% for the next two years, savvy investors know that they really pay much more tax than that when they sell their properties. Even if your gain is not substantial due to a downturn in the market, it’s important to know and calculate the different ways you may be taxed before deciding whether to cash out or defer your tax in a 1031 exchange.
ADDITIONAL TAX LIABILITIES
When you sell improved investment property, you must pay tax on a recapture of depreciation. Even if you have absolutely no gain due to appreciation, you will owe tax at the rate of 25% of the amount that you depreciated, or could have depreciated, during the time you owned the property.
In many states you must also pay state tax on the gain. Depending on the state you reside in, the state tax can add almost and additional 10% on to tax rate. Be sure to check with your tax accountant before selling your property.