What to Keep In Mind When Selling a Rental Property
What do rental property capital gains entail? And what does it really mean selling a rental property? Profits from the sale of real estate assets are what go toward capital gains on a rental property. These transactions are referred to as capital losses when they are not lucrative. When you inherit or receive a gift of an asset, there are specific regulations that must be followed in terms of the basis for your gain or loss.
Long-term and short-term capital profits and losses are categorized accordingly. An asset is regarded as long-term if you keep it for a year or longer before selling it or otherwise getting rid of it. Anything less than a year is considered short-term. Once more, additional requirements apply to assets obtained from a deceased or patent property, as well as applicable partnership interests and commodities futures. Form 8949 is used to report capital transactions, while Schedule D is used to summarize capital gains and deductible losses (Form 1040).
How Are Capital Gains Computed When a Rental Property Is Sold?
The tax rates for capital gains on rental properties might be difficult to calculate. Your tax rate is based on several variables, including:
- Relational status
- How long have you owned the home?
- Whether the property was a principal home, a rental property, or a second home
You must first estimate your tax rate if you need to figure out your capital gains tax. Depending on whether you are subject to long-term or short-term capital gains taxes, this rate varies.
How Can I Sell a Rental Property Without Paying Capital Gains Tax?
Three recommendations are provided below for decreasing or preventing capital gains on rental properties:
- Exchanges Losses for Gains under Section 1031
- Making the switch from a rental to a primary home
- Exchanges 1031
You can sell a rental property and buy a property that is similar to it according to Section 1031. If you use a 1031 exchange to postpone paying your capital gains taxes, keep these things in mind:
- After the date of the property sale, you have 45 days to look for potential replacement properties.
- You may close on a replacement property for up to 180 days.
- You must shut earlier if your tax return is due (with extensions) before 180 days.
Offset Gains With Losses
If you sold a rental property and had capital losses in a particular tax year, you could want to consider deducting your losses from the realized capital gains to make up for any possible losses.
Making the Switch From a Rental to a Primary Home
If you turn your rental property into your primary residence, you can deduct up to $250,000 or $500,000 from the sale of the property if you’re married and filing jointly. You must have been in the property for two out of the last five years before selling it for it to qualify as your primary residence. The two years don’t have to be consecutive.
What Tax Breaks Am I Eligible for When I Sell a Rental Property?
Many of the costs associated with your rental property business are tax deductible. Tax deductions for a rental property are often used examples include:
- Repair costs
- Depreciation on rental properties
- Home loan interest
- Legal or professional fees
Closing Expenses When Selling a Home
Let’s say a property is used as a primary residence before being turned into a rental and then sold. The capital gains from the sale can then be eligible for exclusion on your tax return.
Consult With Tax Experts
Managing capital gains taxes while selling a rental property can be challenging. Consult Your Part Time Accountant tax expert to make sure your taxes are filed correctly and to ensure you are getting the most out of your deductions.
Our accountants are experts in providing small businesses with services such as the taxation of rental properties!