Taxes when selling rental properties (California)

[West_Jones_111]

I'm selling 2 of my rental properties this year, both of which were purchased around 3 years ago.  One was purchased for $50k and I'm expecting to sell for $115k.  The other was purchased for $85k and I'm expecting to sell for $180k.  Trying to figure out what to expect tax-wise.  Is reinvesting the only way to avoid capital gains tax?  What are the other taxes associated with selling a rental property?  Also, I made many improvements on both, but mostly maintenance, repairs, and light remodeling.  I know when selling a personal property, minor repairs and maintenance do not count toward capital improvements, but does this change when selling a rental property?  Can I write off all of it?  Can I also write off selling expenses (closing fees, broker's commission, etc?)  Is there anything that can help?  Obviously I want to pay the least amount of taxes possible.  Also, might be worth noting that I am not a business.

[Critter]

 Is reinvesting the only way to avoid capital gains tax?  If eligible you can do a 1031 exchange but you must follow the rules to the T and you will wind up with another rental property which may not be your goal.

What are the other taxes associated with selling a rental property?  First the depreciation taken or allowed MUST be recaptured as ordinary income at a max of 25% in taxes ... only the profit in excess of the depreciation is eligible for the cap gain treatment.

Also, I made many improvements on both, but mostly maintenance, repairs, and light remodeling.  I know when selling a personal property, minor repairs and maintenance do not count toward capital improvements, but does this change when selling a rental property?  The annual maintenance, repairs & light remodeling should have been taken on the Sch E each year as an expense ... you do NOT get to deduct it a second time.

Can I also write off selling expenses (closing fees, broker's commission, etc?)  Is there anything that can help?  The cost to sell are taken into consideration automatically by adding them to the adjusted basis on the form 4797.

May I suggest you use the downloaded program so you can do some what if  or test  scenarios ... this way you know what you are getting into.  

This is my mini version of the downloaded tutorial that should be in the downloaded program: 

 

What is Forms Mode?

Forms Mode lets you view and make changes to your tax forms "behind the scenes."

If you're adventurous, you can even prepare your return in Forms Mode, but we don't recommend it. You may miss obscure credits and deductions you qualify for, and you may forget to report things that will come back and haunt you later.

Forms Mode is exclusively available in the TurboTax CD/Download software. It is not available in TurboTax Online.

Related Information:

• Why would I use Forms Mode?
• How do I switch to Forms Mode in the TurboTax for Windows software?
• How do I switch to Forms Mode in the TurboTax for Mac software?

If you want to play around with different figures and tax scenarios without affecting your original return you can ….

• >>>In the TurboTax CD/Download software by creating a test copy: 
•  Open your return in TurboTax. 
•  From the File menu, choose Save As. 
•  Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name). 
• Click  Save. You are now safely working in the test copy and anything you do here will not affect the original. 
• https://ttlc.intuit.com/questions/1900642-how-to-make-a-test-copy-of-your-return

• >> use the WHAT IF tool: 
• - Click Forms Icon (upper right of screen) or Ctrl 2 (forms view) 
• - Click on the Open Form Icon 
• - In the “Type a form name.” area type What-If (with the dash), click on the name of the worksheet - click on Open Form 
• - You will see the worksheet on the right side of the screen; enter the information right into the form 
• - To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

It's always a good idea to make a backup copy of your tax data file, in case your original gets lost or corrupted. Here's how:

1. From the File menu in the upper-left corner of TurboTax, choose Save As (Windows) or Save (Mac).
2. Browse to where you want to save your backup.
   • Tip:If you're saving to a portable device, save it to your computer first to prevent data corruption. Then, after completing Step 4, copy or move the backup file to your device.
3. In the File name field, enter a name that will distinguish it from the original tax file (for example, add "Backup" or "Copy" to the file name)
4. Click Save and then close TurboTax.
5. Restart TurboTax and open the backup copy to make sure it's not corrupted. If you get an error, delete the backup and repeat these steps.

If you make changes to your original tax return file, repeat these steps to ensure your original and backup copies are in-synch.

Related Information:                             

• Retrieve a Tax File from a Portable Device
• What's the difference between the tax data file and the PDF file?
• How do I save my return as a PDF in the TurboTax software for Windows?
• How do I save my return as a PDF in the TurboTax software for Mac?
• How can I protect the tax files on my computer?

GEN85508

Answered by TurboTax FAQ to this question

AND save it as a PDF so you have access to a copy even if you don’t have the program still installed and operational :

• How do I save my return as a PDF in the TurboTax software for Windows?
• How do I save my return as a PDF in the TurboTax software for Mac?

AND protect the files :

• How can I protect the tax files on my computer?

[Anonymous]

selling expenses reduce your gain.      any operating expenses that you didn't claim when paid for in prior years are not deductible against rental income for 2019.  if significant, you should amend prior years.   as Critter mentioned you can do a 1031 exchange for one or both properties.  this defers the taxes on the gain but you end up with no cash either.   another possibility is an installment sales of one or both whereby you receive the proceeds of the sales over  2 or more tax years.     it is crucial that the payments   include interest at at least the AFR rate

Reporting the Sale on Your Tax Return
Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. You don't include in income the part of the payment that's a return of your basis in the property. Use Form 6252, Installment Sale Income (PDF) to report an installment sale in the year the sale occurs and for each year you receive an installment payment. You may need to attach Form 4797, Sales of Business Property (PDF) and Form 1040, Schedule D (PDF) to your Form 1040, U.S. Individual Income Tax Return (PDF), along with Form 1040, Schedule 1, Additional Income and Adjustments to Income (PDF). You must also include in income any interest as ordinary income. For details, see Reporting Interest below.

Reporting Interest
You generally report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract doesn't provide for adequate stated interest, part of the stated principal may be recharacterized as unstated interest or original issue discount for tax purposes, even if you have a loss. You must use the applicable federal rate (AFR) to figure the amount of stated principal recharacterized as unstated interest or original issue discount. The AFRs are published monthly in the Index of Applicable Federal Rates (AFR) Rulings. 

https://apps.irs.gov/app/picklist/list/federalRates.html

the downside to doing  1031 other than ending up with no cash is that there are additional costs.  an attorney is usually needed and will spend more time then on a pure sale and there is the cost of the exchange trustee, the one that must hold the sales proceeds.

the downside to installment sales is the possibility the buyer might default and in any event you should have a lawyer review the installment contract.

just so you know its likely that a portion of the capital gain under current tax law will be taxed a 0%

you can use TT taxcaster to estimate your tax 

but perhaps it would be worth it if you buy and download the desktop version of TT  for 2018.  (different versions for Mac and PC's so be careful)  then you could play with various scenarios to help you decide.  the tax law changes for 2019, should not have a significant effect on the calcs.