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Tax Consequences of Selling a Rental Property

You will generally owe capital gains tax when you sell a rental property for a gain. If you have a large gain on the sale, this could result in a significant tax bill.

You may also owe depreciation recapture tax. This applies to offset all of the depreciation deductions you took while you owned the building, and it is taxed at a 25% rate.

Be aware of the tax consequences of selling a rental property and consider the following tips to avoid incurring a large tax bill.

Offset Gains With Losses

Your gain or loss on a sale is determined by subtracting the sales proceeds from your adjusted basis. Your basis starts as the price you paid for the asset, but can be reduced by depreciation deductions or increased by the cost of improvements.

If your rental property is going to result in a taxable gain, you could also sell other assets for a loss during the same tax year. For example, you could sell stocks that are now worth less than what you bought them for several years ago.

The losses may cancel out some or all of the gains you claim on your return. If your losses exceed your gains, you can claim up to $3,000 in capital losses on your current return and carry over the remaining balance to next year’s return.

Use the Exclusion for a Primary Residence

If you have a rental property you used to live in, you may qualify for an exclusion on the gain from the sale of the property. The exclusion amount is up to $500,000 for married taxpayers who file jointly and $250,000 for other taxpayers.

You must meet the following conditions to claim the exclusion:

  • You must have owned the home for two of the past five years
  • You must have used the property as your main home for two of the past five years
  • You can’t have claimed the exclusion in the past two years

You won’t be able to claim this exclusion if you purchased the home through a like-kind exchange.

Exchange the Property

You can defer paying the tax by exchanging your property for a “like-kind” property. If you exchange one rental property for another, you won’t have to pay any taxes until you sell the second property. However, there are strict requirements that must be met to qualify for a like-kind exchange. 

If you can’t avoid the capital gains tax on the sale of your rental property, you may have to pay a 15% or 20% tax on the gain. Consult a tax attorney if you need more time to pay your IRS tax debtz and want to discuss your options.

The Gartzman Law Firm can help you with back taxes and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.