A rental property sale has two components which are taxed at different rates when calculating the taxable gain:
- Depreciation recapture and
- Capital gain
Below is an example to calculate the taxable gain and depreciation recapture of a rental property sale:
For example, if you buy a rental house at $300,000, take depreciation deductions of $100,000 over the years, and then sell it for $320,000 net of selling expenses, your gain for taxes is $120,000. But you "recapture" and pay at a maximum 25 percent rate on the $100,000 of depreciation. The 20 percent maximum capital gains rate applies only to the $20,000 gain remaining.
Capital gains on rental property
The capital gains tax rates vary from 0% to 20% based on your income level. Here is a calculator to assist with the calculation:
Turbo tax capital gains calculator
If you anticipate owing more than $1000 to the IRS for your 2022 tax return an estimated tax payment should be made before January 15th, 2023 to apply towards 2022 tax liability. The payment can be made at the IRS.gov website:
IRS payment portal
Make sure to mark it as applied to 2022 taxes as an estimated payment.
