Bill,

I bought a rental property back in 2005 for $120K taking a loan of $96K.  Long story on this but as it turns out this property was overvalued, etc. etc.  I now want to sell it but, of course, its market value won't cover the expected sales price of about $75K. 

Question, how do I calculate the taxes, penalties due on this property purchased as a 1031 exchange but which I won't exchange upon selling it.  I realize I'll have to cover any difference between the sales price plus costs and the loan amount. 

 This will help me decide on what to do sell or keep.

 Thanks.

Gabriel -

You were not clear if you exchanged into this property in 2005 when you purchased the property.   But I will assume that you did so.

In real simple terms - you calculate the gain that you didn't pay tax on in 2005 and subtract that from the cost ($120K) to get to your tax basis.  From that you subtract the depreciation that you took on both properties (old & current).

The gain will be the sales prices less selling cost less tax basis.   Depreciation recaptured will be taxed at 25% and the balance of the capital gain at 15%.

If the tax basis is less than the $75K selling price you may have a loss.   Be careful of debt forgiveness if any as that may be taxable as well.

Hope that helps,

Thanks.   I just worked through the numbers and understand this better.  As it turns out my deferred gain was 61K so my tax basis is pretty low, about 60K.

Depreciation recaptured is about 10K.  So I estimate my gain as: 25% of 10K plus 15% of 15K =$4750.

 I hope I got this right.  Thanks again. 

Gabriel - that looks close enough to help you make the decision on selling or not.  

I'm not sure if you counted the depreciation previously deducted in the $60K of basis.   If you did then your taxes may be even lower total gain of $15K (75 - 60) - $10K at 25% and the remainder of the gain of $5K at 15%.   Depends if you included the depreciation in the $60K basis.

If you need closer calculation have your CPA calculate the actual tax.

You're on the right track.

Regards,