Essentially, this could cut your capital gains tax bill to zero if you have enough investment losses to cancel out the profits. If your entire portfolio did well over the past year then you may need to consider other ways to cut your taxes than loss harvesting. Or it may not yield enough of a benefit to offset all of your capital gains from selling a rental property.
Section of the Internal Revenue Code allows you to defer paying capital gains tax on rental properties if you use the proceeds from the sale to purchase another investment. There are a few rules to know about Section exchanges.
First, this is a like-kind exchange, which means that the rental property you buy must be the same type of property as the one you sold. The good news is the IRS allows for some flexibility in how like-kind is defined. But if you sell real estate at a profit after owning it for one year or less, the profit is a short-term capital gain. So it's taxable as ordinary income at your marginal tax rate.
The drawback is that the IRS wants its money when you sell the property. Think of it like a traditional IRA. But when they withdraw money, it's taxable income. The same concept applies here. It's called depreciation recapture tax. Depreciation initially reduced your taxable rental income, which is taxed as ordinary income.
Because of that, depreciation recapture is also taxed at ordinary income tax rates as opposed to favorable long-term capital gains rates. The IRS calculates depreciation recapture based on "allowed or allowable" depreciation. That sounds like a huge tax bill. But there's good news for investors: you can avoid paying capital gains and depreciation recapture taxes when you sell a rental property. You just need to use a exchange. The general idea is that if you sell an investment property, you won't pay any taxes on the sale if you use the proceeds to buy a similar property.
You have to buy the new property for the same amount as or more than what you sold the first property for. And it needs a similar financing structure.
And you need to identify properties within 45 calendar days of the sale of the first property. You have to close on the new property within days, too. There are other rules for completing a exchange, so be sure to do your research before starting the process.
Like with most other tax concepts, there are gray areas. For example, you might not be sure if a certain expense is deductible. Or you may not know how to value the land your rental property is built on for depreciation. A tax attorney or a reputable and experienced tax preparer can answer your questions. Our team of analysts agrees. These 10 real estate plays are the best ways to invest in real estate right now.
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Whether you're thinking of selling your first rental property or your seventh, it's important to consider the tax implications. Like it or not, the taxes on selling a rental house can add up fast. To give you a better idea of what to expect, here is an outline of how rental property sales are taxed, as well as some common strategies investors use to avoid taking a substantial tax hit.
This should give you a sense of how selling your rental property will affect your tax bill -- and position you to make that hit as small as possible. When you sell a rental property, it gets taxed differently than if you were to sell your primary residence. In selling your primary residence, your profits aren't taxable up to a certain point. Beyond that point, however, your profits are treated as capital gains.
The process gets a bit more complicated when you're selling a rental property. In this case, any profit you make on the sale is taxable. Plus, you also need to account for an additional tax: depreciation recapture.
There are two kinds of capital gains taxes, and each is taxed differently. Property Management Tax Deductions. Estimate your tax refund and where you stand Get started. See if you qualify for a third stimulus check and how much you can expect Get started. Easily calculate your tax rate to make smart financial decisions Get started.
Estimate your self-employment tax and eliminate any surprises Get started. Know what dependents credits and deductions you can claim Get started. Know what tax documents you'll need upfront Get started. Learn what education credits and deductions you qualify for and claim them on your tax return Get started. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.
Skip To Main Content. Straight sales. Installment sale You may sell a building and accept payment in installments, which can spread the tax liability over a number of years. What about state taxes?
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