There are several tax consequences when selling residential rental property. Profits from selling rental properties are taxable.
Capital gains occur whenever an asset is sold for any amount of profit. The capital gain may be either short term or long term, depending on how long the property has been held. A short term gain is a gain on property that was held for a year or less. Short term capital gains are taxed at the same percentage as your regular income tax.
A long term gain occurs when you hold the property for more than a year. The long term capital gain rate can vary from 0% to 20% depending on the taxpayer's income and filing status.
Depreciation Recapture is another type of income that is associated with the Sale of Residential Rental Property. Depreciation recapture requires the taxpayer to pay taxes on the accumulated depreciation at the higher rate of up to 25%, rather than the capital gains rate. Depreciation recapture is limited to the smaller of the realized gain on the sale or the accumulated depreciation of the asset.
The IRS requires that residential rental property be depreciated over 27.5 years. Depreciation spreads the cost of an asset over its expected lifespan. Accumulated depreciation is the sum of all depreciation claimed on tax returns from the first year the property was rented to the year it was sold.
In calculating gains from the sale of rental property, it is important to include all relevant selling expenses. Selling expenses may include repairs, realtor commissions, and closing costs. Selling expenses can reduce the amount of gain.
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