I have a rental home in California we bought in 1986 for $100,000 and can sell for around $360,000. that I’d like to sell but was told I would have to pay 35% in capital gains tax which would be around $100,000. Would this be correct or does the percentage go by you income? If I moved into it for two years and made it 50% rental would I only pay 50% of the capital gains?
Terry Says: You need to talk to your accountant, who is familiar not only with Federal but California state tax laws. You are correct that capital gains tax rates depend on your ordinary income tax bracket. In fact, here’s a link to a calculator that will help you determine your capital gains tax rate, depending on your ordinary income tax bracket: http://www.moneychimp.com/features/capgain.htm
The maximum capital gains tax rate for Federal taxes is 35 percent. But you also would have to take California taxes into account. Of course, if it were your personal residence, you would get a tax break on the first $250,000 of gains ($500,000 on a joint return). But if it is not your residence, then you don’t get the break. If you made it your residence (and don’t currently live in California) you might have to pay state income tax on ALL your income there! I would assume if you rent a portion, you could deduct a proportionate amount of the gain — but again, this would be something an accountant could tell you specifically. (Also there may be deductions you have to recapture if you depreciated the rental property– and there may be a break on the gains for money you invested to improve the property.)