@Anonymous , the amount of mortgage principal owed has NO place in the gain/loss computation ( for tax purposes )
In general
(a) Basis in the property = Acquisition COST + plus cost of any improvements during the holding period.
(b) Depreciation Basis = Acquisition Cost LESS Land / non-depreciable Cost. It is the cost of the improvements. It is often 2/3 or 1/2 of the purchase price, sometimes allocated in multi-story buildings with many condos. Note annual depreciation is based on Depreciation Basis and the Useful Life of the asset ( residential property in the US has a life of 27.5 years
(c) Accumulated Depreciation = allowable depreciation ( whether recognized or not ) over the holding period.
(d) Sales Expenses = Allowable / customary and necessary expenses associated with disposition ( such as sale commission, Transfer tax, title work, immediate repair work etc. expressly for the sale etc. etc. )
(e) At disposition / sale , the cost basis = Original Basis [ item (a) above] LESS Accumulated Depreciation [ item (c) above ].
(f ) Taxable Gain/Loss = Sales Proceeds ( i.e. Sales Price LESS Sales Expenses ) LESS COST BASIS
Note that only that portion of the gain above/beyond Accumulated depreciation is treated as Capital gain the rest is ordinary gain.
(g) Actual amount received by you before taxes is Sales Price LESS Loan Balance. However this has nothing to do with the taxable gain/loss computation.
Is there more I can do for you ?
