Hi Terry I read your column just about every week and my question to you is about capital gains. My brother and I purchased a commercial property in 1979 and ran a business for over thirty one years. We paid seventy-five thousand for it and sold it for four hundred thousand in 2015. We owned it for thirty six years and put two additions on it, one in 1984, and one in 1992. The first addition cost about 37,000.00 and the other one about 14,000.00. Will we be able to use any of these amounts for deductions on our income tax.
My next question is my wife and I work part time and earn about 36,000. between us, and I receive about 16,000 a year from social security, which totals about 52,000. Can you tell me what capital gains bracket we would be in. My brother and I would split the 400,000. I read in your column back in October, and you mentioned that if you hold on to the asset longer than one year, you receive a preferential long term capital gains tax rate when the property is sold. Any information would be greatly appreciated. Thank you very much.
Terry Says: OK, you need a Certified Public Accountant (CPA) to help you file the appropriate returns. The simple answer is that yes, you can get capital gains treatment — and yes, the cost of improvements can be added to your “cost basis” for the property. The maximum capital gains tax rate is currently 20 percent. Depending on your income level, you may pay a lower rate, which is why you need a professional.
Also, you may have had an accountant who “depreciated” the property on your business tax returns to lower your annual taxes (assuming the business filed returns). If so, those amounts would have to be added back in to determine the amount of the gain. There may also be some questions about how the business handled the property, assuming business owned it, or depending on how the property was titled. So I can’t give you blanket advice except to get a competent tax preparer to give you a specific answer.
One thing I will note: From my basic math, it looks like the two of you will split a capital gain of $270,000. That amount, if split equally, will add about $135,000 to your tax return. The capital gains tax will be applied based on your ordinary income plus the gain. That higher income very well might throw you into paying a higher cost for Medicare Part B or other senior programs, and even result in — temporarily — being required to pay taxes on your Social Security benefits. For example, a married couple filing jointly with income over about $170,000 pays more each month for the Medicare Part B premium. A tax preparer should easily be able to let you know where you stand on these issues.