Having 30+ rental properties myself, I have always wondered how much I would be taxed on the sale of any of my rental properties. Now, I usually hold onto these properties for a very long time but sometimes I find it best to sell.
What capital gains on rental properties comes down to is the current years capital gains rate that congress has passed as a tax. Currently, the capital gains tax rate is 15%. This means that any profit you make on the sale of a rental property, you would pay 15%. If you sold the rental property for $100,000 profit, then you would pay the capital gains dollar amount of $15,000 to the government.
What Goes Into The Capital Gains Rate
The amount of capital gains you will pay on the sale of your rental property depends on a number of factors. The main one is how long you owned the property and if you ever lived in the property.
Also, whatever tax bracket you are in will also determine how much you will pay in taxes.
Remember, capital gains tax is on the PROFIT you make in the sale of the property. There are many things you can deduct from the profits to reduce your taxes which I'll get into in a little bit.
Calculating the Capital Gains Tax On Rental Property Sales
Now I am not an accountant but here is my best attempt to help you understand how the taxes are calculated.
Adjusted Cost Basis for Capital Gains Tax on Rental Properties
When you purchase a property, you can deduct all the expenses that go into the home since the purchase.
- Closing costs
All of these would increase your total cost for the property.
For example: If you bought a home for $100,000 and had closing costs of $5,000 and remodeled the kitchen for $25,000, and replaced the carpet for $5,000, then your total cost for the property is $135,000.
That means, if you sell the property for $200,000, your profit you are taxed on is the difference between $200,000 and $135,000 leaving you with a profit of $65,000. BUT, there is more you can save here.
Finding the Sale Price Less Expenses
If you were to sell that property for $200,000 and have closing costs of $8,500, then your total sale price that you would use for your taxes is $191,500 instead of the $200,000.
This is because you are able to deduct your expenses from the sales price to find your amount of the sale that is realized to you.
Calculating It All To Get Your Tax Amount
After you have your adjusted cost and your realized sales amount, you can find your profit to be taxed on.
$191,500 – $135,000 = $56,500
Now, talk to your accountant and have them make sure everything is in the IRS code for you taxes because this is just a simple example.
From here, you take your $56,500 profit on the sale of the house and multiply it by 15%.
$56,500 * 15% = $8,475
So, from this example, you will pay roughly $8,500 to the IRS for your capital gains tax on rental property.
Watch out for depreciation in your taxes when you sell.
Also, the IRS has given us investor the ability to depreciate the value of the home over 27.5 years. This has helped us pay much less in taxes over the years.
Now, once you sell, you may have to pay a portion of that back to the IRS.
This is a much larger conversation you need to have with your accountant and way beyond the scope of this capital gains article. Be sure to consult your accountant on all of this.
Ways to Get Out of Capital Gains Tax on Rental Properties
- Living in the property
If you personally live in the property, you have the potential to not pay taxes at all or pay much less than you would if you never lived in the property.
- Updating the property to make it worth more
As you fix up the property, you make the property worth more. But, as you update it, you are spending money doing so. All of that money can be deducted from the dollar amount you are taxed on.
- Any and all closing costs associated with the purchase and sale of the home
When you sell your home, be sure to account for all your expenses. These can be deduced from the value of your home.
Bottom line is that you will most likely pay taxes if you make a profit. The only thing is how much.
It is not as much as it may seem and you can even lower that amount.
Again, be sure to consult your accountant on all of these items.
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