What Form 1120 C Recapture 2023-2024

Welcome to 10:31 University. I'm Paul Holloway. Today, we are going to go over a basic example of how the numbers play out if you sell an investment property and if your goal is to simply cash out on that investment. We will discuss how much tax you would be expecting to pay to the federal and/or state governments. It can be surprising how much taxes there are out there. However, we will tie it into a 1031 exchange, which allows you to defer taxes by reinvesting in one or multiple investment properties. Let's say I purchased a rental property for $200,000. Your CPA will likely refer to this as your basis, which is the starting point of your investment. The fact that it is a rental property provides benefits, such as the ability to depreciate it on your yearly tax returns. This can help reduce your tax liability. Assuming we took $40,000 of depreciation throughout the years, let's move forward to selling the investment. Let's say we sell it for $600,000, making a $400,000 gain. If we simply cash out on this investment, we will have a tax hit. Under current tax law, as a middle-class taxpayer, I would pay 15% to the federal government and around 5% to the state government (in Colorado). This totals to a 20% tax hit, resulting in an $80,000 loss from the $400,000 gain. Additionally, we have to consider the depreciation taken. The IRS allows you to take yearly write-offs, but if you cash out, they recapture the depreciation at a 25% rate. This means that the $40,000 of depreciation will result in an additional $10,000 loss. Furthermore, high-income earners may have to pay higher tax rates, potentially up to 20% federally. There is also a possibility of a 3.8% Medicare surcharge tax for some high-income earners....