Capital Gains

[Brian Todd]

Good morning!

We sold our rental (a condominium) this month. We purchased the condo in 2019 for $525k in Petaluma, CA. We sold it on October 7th for $609K. We also spent approximately $23k on upgrades to the unit (new carpet, painting the entire interior, new light fixtures and bathroom remodel) prior to listing the property. My question is: our combined salaries are approximately $425k between my spouse and I so we would be in the 15% captial gain calculation I believe. How do we deduct our expenses for improvements in order to reduce our captial gains tax. We did have $21k held out at closing for California Capital Gains and are curious if our expenses will reduce that amount due along with Federal capital gains. Thank you!

[Cindy4]

In short, reporting the sale of a rental requires calculating the adjusted basis in the property.  This is generally the original cost minus depreciation taken or allowable plus the cost of the improvements.  Once this is determined, it is subtracted from the sale price to determine any gain or loss. 

If you’re using TurboTax, you will see a question in the rental property section, “Tell us about your situation this year check the Sold or disposed of property box along with any other boxes that may apply and Continue.”  You will have the opportunity to enter the improvement costs, sales expenses, and other information related to the sale. 

If you have not been taking depreciation, you may have to report an adjustment to current expenses for the rental to account for it.  This will require filing an additional form called a 3115

Here are some additional resources regarding sales of rental property that may help:

IRS publication on sales of assets

How to report in TurboTax

Hope this helps!

Cindy

[KarenJB]

Your capital gain tax will be at 15% as long as your taxable income is below $583,750 for 20924; given the amounts you presented, that will not be an issue.

You will report the expenses related to selling your property on Form 4797, Sales of Business property, in Part I, line 2 (f); you would add whatever costs you incurred onto the basis (the amount you originally paid for the house) to come up with your total cost. This will reduce your gain, and hence your capital gains tax.

In addition to the amount you spent fixing up your property to sell, you can also deduct the following:

- Selling costs themselves such as closing costs and commissions paid to your real estate agent.

-Capital improvements you made to the property while you owned it, such as remodeling.

Thanks for your question!