Tax implications of selling investment condo at a loss

Ilyce Glink & Samuel Tamkin for Real Estate Matters Chicago Tribune write: Question: I purchased a condominium in 1997 for $78,000 and rented it out shortly after my purchase. I took the standard depreciation during tax filing period each year. The condominium was paid in full in 2004.
Answer: I sold the condo for $60,000 and netted $52,000. I have never sold a property of any kind before this. Bottom line, will I owe any taxes on the $52,000 I received for the sale of the property?

A: At first glance, you look at your situation and think that you have had a loss and shouldn't owe any federal income taxes on the sale. That may still be the case but you'll have to go through the numbers to find out what your tax bill is.

You owned the condominium for about 16 years but sold it that last year. In essence, you were able to depreciate half of the condominium's value. We don't know what value you gave to the condominium to start the depreciation. Usually, when you buy a condominium you are able to take depreciation on the building portion of its value but not the land component.

But if we assume you allocated about 10 percent to the land and 90 percent to the condominium, you were able to depreciate about $35,000 over the years. On the sale of the condominium, the IRS would want you to repay that depreciation benefit at a 25 percent rate or about $8,750. That sum would be due in taxes to the IRS.

You held the property for investment purposes and you're not a professional investor. As such, you may have had losses in your ownership of the condominium during the years you owned it and were not able to take those losses.

On the sale of the condominium, it appears that you have a loss of about $18,000. Given that loss and any other carry-over losses you might have had over the years, you may not have any tax to pay or you'll cut down any taxes you may owe as a result of those losses.

One additional item that you might need to consider, while you sold your condominium for $60,000, you probably also had other expenses that you put into the condominium and the association over the 16 years you owned it.

The money you put into the unit and building -- if any of that money was for capital expenses -- that money would have increased the basis (or cost) of your condominium and increased your loss.

As you can see, it can get rather complicated, even for a real estate investment of $78,000. When the tax preparation programs come out, you can give it try to see what you might owe, or you'll have to talk to a tax specialist to help you fill out the tax forms.