Investment Property Tax Tips When Selling

Yes, it’s that time of the year again

The Internal Revenue Service really, really wants to hear from you by April 15^th.  And they want to know just what you owe them on your investment property sales.  Here are a few items you’ll want to discuss with your tax professional concerning your real estate investments over the last year.  While you’ll have to pay taxes on profit earned from your rental properties, you may be able to limit the damage if you bought more investment property, or if you were able to move in to one of your properties and made it your primary residence prior to selling it.  These are very basic investment property tax tips when selling your rental property.

Determining your profit

In order to determine your profit on a particular piece of rental property, you’ll first need to figure out your adjusted cost basis.  Your purchase price is only the starting point here.  You’ll then add in all your closing costs, as well as all your improvement costs to the property as well.  You’ll also need to add in the total depreciation you previously claimed on the property too.  Your profit is the amount you get when you subtract this adjusted cost basis from your sales basis (the selling price less costs of the sale, like broker commissions, for example.)

Are you eligible for the capital gains tax?

Assuming you did manage a profit when you sold your rental property as described above, and you held the property for at least a year, you’ll pay a capital gains tax.  In 2013, this tax rate is 15% (or 20% if your taxable income as a single taxpayer is above $400,000, or $450,000 if married and filing jointly).  In addition, you’ll have a surtax added to pay for Medicare – an added 3.8% of your profit if your taxable income is over $200,000, or $250,000 if married.

Buying more investment property advantages

A good way to avoid capital gains on the sale of your property is to buy more investment property!  There is a part of the IRS code, section 1031 to be exact, that allows you to carry your cost basis forward from a newly–sold property to a newly-bought property without having to pay taxes on the sale.  There are however, many IRS rules regarding how the monies are held between the sale and purchase, as well as strict time lines for achieving this little maneuver.  So while this is part of many basic investment property tax tips, again, check with your tax professional regarding the exact way to accomplish this tax deferment properly.

Converting to a primary residence

As long as you live in your former rental property for at least two years, you can claim a part of the standard home $250,000 exclusion for your primary residence (or $500,000 if married and filing jointly) when it comes time to sell your rental property.  This exclusion will be prorated based on the length of time you lived in it versus how long you actually owned the property.  (For example, if you owned the property for 8 years, but lived in it for 4 years, you’d be able to claim 50% of  the exclusion.)  Of course, always check with your tax professional for further advice on how to save from overpaying the IRS when investment property is involved.

 

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