Taxes You Need to Pay When Selling Your Rental

Taxes – UGH! Unless you’re an accountant with a love for
numbers, the word probably brings with it a feeling of dread when you hear it.
Some folks pay them annually to the IRS. Others must pay them quarterly. And we
all get to pay them daily when we purchase stuff. Like death, they cannot be
avoided! And if you’re selling your rental, there are a couple tax basics you
should know. First, your rental is a business asset. So the taxes you need to
pay on it are due only when it sells at a profit. But if your rental sells at a
loss, you can write off the loss to offset taxable income. The key to knowing
the taxes you need to pay is found in correctly calculating the amount of gain
or loss on the rental you sold.

How a Profit or Loss is Determined

Your profit or loss is determined by subtracting your
property’s adjusted basis on the date of sale from the sales price you receive
(plus expenses, such as real estate commissions).

To understand your property’s adjusted basis, you must first
know what “basis in property” and “adjusted basis” mean. Basis in property is
the amount of your total investment in a property. And it is not fixed. It
changes over time to reflect the true amount of your investment. Each change or
new basis is called the adjusted basis.

Taxes You Need to Pay When Selling Your
Rental Property at a Profit

When you sell a rental property at a profit, you pay taxes on the gain (profit) you realize (earn). These taxes are called Capital Gains Tax.

in basis
increase the gain or profit you realize and therefore increase your
tax liability when you sell your rental.

Taxes You Need to Pay When Selling
Your Rental Property at a Loss

If you sell at a loss or lose money, you’ll be able to
deduct the loss, but not without being subject to important limitations.

Increases in basis are lower your tax liability because they lower your profits.

Here’s an example from

Viola bought a small apartment building and sold it six
years later for $300,000. Her starting basis was $200,000. During the time she
owned the property she took $43,000 in depreciation deductions and paid $13,000
for a new roof (an improvement). Her depreciation deductions reduced the
property’s basis, but the roof improvement increased it. Her basis at the time
of the sale is $170,000. Viola calculates her taxable gain on the property by
subtracting her adjusted basis from the sales price: $300,000 – $170,000 =

As you can see, when you sell your property, you effectively
give back the depreciation deductions you took on it. Since they reduce your
adjusted basis, they increase your taxable gain. Thus, Viola’s taxable gain was
increased by the $43,000 in depreciation deductions she took. The amount of
your gain attributable to the depreciation deductions you took in prior years
is taxed at a single 25% rate. Viola, for example, would have to pay a 25% tax
on the $43,000 in depreciation deductions she received. The remaining gain on
the sale is taxed at capital gains rates (usually 15%, 20% for taxpayers in the
top tax bracket).

How to Avoid Taxes You Need to Pay
When Selling a Rental Property

Rental properties generate a respectable profit each month,
provided you choose the right rental properties. But they can cost you when you
sell. Here are three strategies that help ease the burden of a significant tax
bite when you sell a profitable rental.

  1. Offset gains with losses
  2. Take advantage of Section 1031 of the Tax Code
  3. Turn your rental property into your primary

Offsetting gains with losses through tax-loss harvesting is for those with capital losses in a given tax
year. This strategy allows a landlord to subtract those losses from the capital
gains from the sale of their rental.

Taking advantage of the IRS Section 1031 “Like-kind” exchange
is for those who are able to reinvest the proceeds of selling their rental property
in new real estate. This strategy allows them the ability to defer some or all
of the taxes on the capital gain.

Converting your rental property into your primary residence
is for people who want to do so for better tax treatment when they sell. Landlords
who convert a rental into their home to live in are able to exclude as much as
$500,000 in capital gains from taxes.

Hire the Right Financial Advisor

When it comes to investments and knowing what taxes you need to pay on the sale of a rental, it’s always best to find and hire the right financial advisor. And it doesn’t have to be hard to find one who fits your needs. SmartAsset offers a free tool to match you with fiduciary financial advisors in your area in five minutes.

Hire the Right Real Estate Agent

If you’re selling a rental property, contact Charles D’Alessandro, your Brooklyn Real Estate Agent with Fillmore Real Estate. Call (718) 253-9600 ext.206 or email With 30-plus years of real estate experience in Brooklyn, he can help you with all your real estate needs.

Charles D’Alessandro
Your Brooklyn Real Estate Agent
718-253-9600 ext. 206

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