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Level 1

# Calculate the capital gain on the sale of a rental property

I have a home that my wife and I inherited from her father in 2011.  Her father purchased it in 1993 for \$100k.  In 2010, her father upon the death of her mother, removed her mother and added my wife to the deed.  We have rented the property, along with two other properties since he passed away.  We have filed form 4562 for this property over the years.  For 2023, the entry on line 19b of form 4562 shows: 8600, 5, HY, 200 DB.

We now want to sell the property at a considerably high price,  approximately \$450k.  How do I calculate and pay the capital gains to the IRS and the state of California?

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Employee Tax Expert

## Calculate the capital gain on the sale of a rental property

The three items that will determine the gain or loss on the sale of rental property is the Adjusted Basis, Depreciation Taken to Date and the Selling Price.

The tax you pay after selling a rental property depends on your profit.  The IRS taxes the profit in two ways.  The first is a capital gains tax that is 0%, 15%, or 20%, depending on your taxable income and filing status.  The second is a maximum depreciation recapture tax of 25%.

Adjusted Basis Assumption:  Your wife’s basis is ½ of the purchase price plus ½ the cost of any improvements made up until the time of her mother’s death.  It is assumed that her father gifted her ½ at the time of her mother’s death.  To this amount is added ½ of the Fair Market Value at the time of her father’s death.  The total of these two amounts is what you should be using for depreciation of the rental property and in the calculation of the gain or loss on the sale of the rental property.

If this was not the adjusted basis used for rental depreciation, a Form 3115 may be filed with 2024 tax return.  The Form 3115 corrects the depreciation.

The Selling Price for tax purposes would be the Gross selling price less selling expenses such as commissions and other closing costs paid by the seller.

A simple example follows:

\$200,000  Net Selling Price

\$100,000  Adjusted Basis (135,000 less 35,000 of depreciation)

\$100,000  Gain

< 35,000> Depreciation recapture taxed at ordinary income tax rates

\$ 65,000    Capital gain, taxed at capital gain tax rate of 0%, 15%, 20%

If you are using TurboTax, the program  will calculate the ordinary and capital gain on the sale of the rental.  You will need to follow the prompts in entering the sale information.  The sale information would be entered in the rental section of the program.

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Level 1

## Calculate the capital gain on the sale of a rental property

How do I determine the fair market value so that I align with the IRS and FTB of CA?

Employee Tax Expert

## Calculate the capital gain on the sale of a rental property

The fair market value is the price that the property would sell for on the open market.  If an appraisal was not done at the time of death, then you may use the Property Tax Assessment records to determine the fair market value at the time of your father in law’s death.

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