If you reported the sale correctly in the Rental & Royalty Income (SCH E) section of the program, then when you sell rental property there are several things that are true.
- All depreciation taken on the property is recaptured in the year you sell. That recaptured depreciation is added to your sales price and taxed. That recaptured depreciation is also added to your AGI, thus it has the potential to put you in the next higher tax bracket.
If you did not take depreciation on the property during the period of time it was a rental, then you get fined for that. The way you're fined, is that the depreciation you "should" have taken is added to your sales price - thus you pay taxes on it anyway. Yes, that's double-taxation. It's also your penalty for not having depreciated it to begin with.
Rental property will almost always operate at a loss "ON PAPER" when you complete your tax return. This is especially true if you have a mortgage on the property. WHen you add up the deductible mortgage interest, property taxes and insurance, then add to that the depreciation you're required to take, you'll find the total of those items alone will exceed the total rental income received for the year. Add to that your other allowed rental expenses (maintenance, repairs, etc.) and you're practically guaranteed to operate at a loss.
When you sell the property, here's "the basics" of how it's handled.
- First, recaptured depreciation is added to your sales price
- Your cost basis is then subtracted from the adjusted sales price to determine your gain.
- Next, carry forward losses are deducted from that gain to determine taxable gain.
- If carry forward losses get your taxable gain on the sale to zero, then any remaining losses are deducted from "other" ordinary income up to a maximum of $3000 per year.
- If after deducting the maximum of $3000 from your "other"t taxable income there are still losses left, they are carried forward to the next year where a maximum of another $3000 can be deducted. This continues each year until all of your deductions are used up, or 20 years - whichever occurs first.
If you have any remaining losses to be carried forward to your 2020 taxes, you will see those on the IRS Form 8582, worksheet 6, column b.
