Posted by John Corey on March 23, 2006 at 10:08:35:
I believe you are closer than I was.
The calculation is a bit more complex in that you take the purchase price plus all capital improvements (new roof, etc) minus the depreciation to determine the tax basis. The profit is the difference between the sale price minus closing costs and the tax basis.
Depreciation is taxed at the recapture rate which is not the same as the long term capital gains rate.
Short term capital gains rate is the ordinary income tax rate for the individual (think tax rate on your income from your job).
Even the above is not a full and complete answer.
What is important to me is the following.
Investment property held for 1 plus gets taxed at a different rate and generally a lower rate than investment property held for 1 year or less.
For the fine details I just send it to my accountant they work out the recapture, the tax basis, the long vs. the short term gains and if there are any losses carried over that can be used to offset the possible taxes owed.
You make your money when you buy and get the cash when you sell or refi. Hence I focus on finding the deals and let my accountant advise me on the details for paying the tax. Paying some tax implies I must be winning in that I am showing a profit.