Capital Gain on the Sale of Rental Property. 
Determine the Adjusted Basis of your Rental
Property to determine the Capital Gain when
you sell it!

Capital Gain Definition

Capital gain is defined as the amount by which the selling price
of an asset exceeds the purchase price; the gain is realized when
the asset is sold.


Calculating Gain or Loss on Rental Property
To determine the gain or loss on the sale of your rental property,
you need to determine the selling price, the adjusted basis, plus
subsequent capital improvements, and minus depreciation.

Example:  Brett purchased a residential property 5 years ago for
$200,000.  He plans on selling it now for it's current fair market value
of $475,000.  Brett has taken an annual depreciation expense of
$5,400 resulting in a total of $27,000 ($5,400 x 5 years).  Over the
same time he made improvements to his rental property at a cost
of $10,000.  His costs associated with the sale of the property are
$10,000.  The taxable gain on the sale of his rental property is
determined as follows:
 

Brett's taxable gain of $282,000 will be taxed at two different rates,
one for the depreciation amount of $27,000 and the other for the
remainder of the gain $255,000 ($282,000 - $27,000).

Since Brett took a depreciation deduction during the time he owned
the rental property, he would need to recapture the cost.  Under
current law, depreciation recapture is taxed at a maximum federal
tax rate of 25%.  Brett will owe $6,750 due to the depreciation
($27,000 x 25%). 

The remainder of his gain, $255,000, will be taxed at whatever
capital gain tax rate applies to him.  Let's assume Brett has a
capital gain tax rate of 20%.  He will owe $51,000 in taxes on the
remainder of his gain ($255,000 x 20%).

Thus, Brett's total federal taxes due will be $57,750 ($51,000 +
$6,750).


Capital Gains Related to State Taxes
Note that state taxes may also be due in addition to
federal taxes.  States may have different rulings for taxing
capital gains.  Before you sell your rental property, you should
understand the state tax rules.  If your property is located in a
state other than your primary residence, it would be smart to learn
the rules of both the state of your residence and the state your
rental property resides in.  Both states may have a vested interest
in your taxable gain.  When in doubt, consult an accountant or tax
attorney.

If your sale results in a loss, the entire loss can offset income from
other sources.


Tax Free Exchange of Like-Kind Property
Is there a way around paying taxes when you sell your rental
property?  You bet there is! 

The Starker 1031 Tax-Deferred Exchange allows you to
avoid paying taxes on the gain on the sale of your home.

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