Two people this week have asked me about their rentals. Both are considering selling and have various questions, many of which have to do with the tax ramifications of selling. First let me say I am not an accountant. The best person to discuss that issue with is your accountant because they know your situation and the laws that pertain to you. With that in mind, I can share some general information on the tax issues related to selling rental property.
Investing in rental properties is a great way to round out your portfolio. It provides investors with a steady stream of income which pays down a mortgage allowing you to acquire an asset using someone else’s money. It can also provide a large chunk of money when you sell the property. Of course the government wants its share too.
When you sell an investment property there are two types of taxes that are collected. The first is either short or long-term capital gains (depending on how long you have owned the property). Short-term gains (if you own the property for one year or less) are based on your federal income tax rate. Long-term gains are as much as 20 percent depending on your taxable income.
The second tax is done to recapture depreciation you have taken on the property. This is also treated as normal income so taxed at that rate.
If this is causing you to glaze over talk to your accountant who can give you specific numbers for your situation. If you enjoy reading about this subject here is a great article with even more details.
There also are ways to minimize the tax or defer it. The first is to move into the rental and live there for two years (if you have owned it for at least five). Then you can take a home-owner exception on part of the gain. The second is to sell and use a 1031 Exchange to roll the proceeds into another investment property. This is something I can help you with if you are interested. Give me a call if you want to discuss selling your rental.