Paying taxes on your rental property sale
June 1st, 2007 by helpfulfactsYour rental property sold and the closing went off without a hitch. Time to celebrate, right? Not just yet. Uncle Sam may be waiting for his share of the profits.
Capital gains taxes are a part of all real estate transactions realizing a gain (unless you are rolling the profits into another investment vehicle through a tax-deferred 1031 exchange). Property sales taxes are due at the time of sale. Of course, if the sale shows a loss, there is no tax liability.
Here is a closer look at the different tax scenarios of selling a rental property:
Capital Gains – After a building has been owned for more than 1 year, it is considered a long-term investment. Sellers pay capital gains on the amount of the selling price minus selling costs and adjusted basis in the property. The tax on this amount (the capital gain) is calculated at the capital gains rates, which is lower than the regular income tax rate.
Capital Loss – If you lose money on the sale, you may get a tax break in the form of a capital loss. Keep in mind a paper loss–a decrease in the property’s value below its purchase price–does not instantly qualify as a loss. The loss must be calculated on the sale or exchange of the property. You can then use this loss against capital gains or against regular income when paying your taxes, depending on tax rules.
Like-Kind Exchange – If you want to defer capital gains taxes, you can roll the profits on your sale into another investment property under a federal 1031 exchange, also known as a like-kind exchange.
Here is how it works: The proceeds from your first investment property are held by a third party until you purchase another investment property within a specific time frame. Specific rules must be followed such as type of property, value, etc. Assuming the transaction meets all IRS requirements, any capital gains are deferred until you sell the new property.
Importantly, you can continue to build equity by transacting one like-kind exchange after another. Many property investors use like-kind exchanges to build their rental property holdings.
Posted in Landlords, Real Estate Investing |
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