Selling an Investment Property

[Miss Cathy]

I want to know how to figure the tax impact of selling an investment property.  We own a property that we've rented out for many years.  If we sell it, are there items we can deduct from the sales price, in order to compute the taxable amount?  What IRS publications would provide this information?

[Sean Enrolled Agent]

Hello Miss Cathy,

You asked "What IRS publications would provide this information?". I can certainly help you out with this.

Publication 544 and publication 527 are two IRS publications that deal with selling a rental property, as well as having a rental property.

https://www.irs.gov/forms-pubs/about-publication-544 

https://www.irs.gov/publications/p544

Publication 544  explains the tax rules that apply when you dispose of property. It discusses:

• How to figure a gain or loss.
• Whether it is ordinary or capital.
• How to treat the gain or loss.
• How to report a gain or loss.

According to the IRS, deductible closing costs include interest, real estate taxes and some mortgage points. 

When you sell the home, you can use settlement fees and closing costs for buying the property to use as an addition to your original basis.
Other expenses include:

• Abstract fees
• Charges for installing utility services
• Legal fees
• Recording fees
• Surveys
• Transfer taxes
• Title insurance 

https://www.irs.gov/publications/p527

https://www.irs.gov/forms-pubs/about-publication-527 

I would also suggest reviewing the TurboTax website dealing with Rental Real Estate:

https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71 

 
Thanks,
Sean

[Miss Cathy]

Thank you Sean for your reply and for the links.  We've had the property for over 40 years, so the property is paid for (no mortgage) and we've completed the depreciation in our tax returns a long time ago.  I want to calculate the impact that a sale of this investment property  would have on a future tax return. So I'm looking for the info on what amounts (income and deductions) are needed to do this calculation.  Any other comments are much appreciated.

[NateTheGrEAt]

Hi Miss Cathy, 

Since your property is fully depreciated, the entire sales price (less selling expenses) would be your taxable gain. You would be allowed to deduct selling expenses such as sales commissions, title insurance, transfer taxes, etc. In addition, if you make improvements to the property before selling it, these would be added to your basis and would reduce the amount of taxable gain. 

If you are interested in owning other investment real estate, you may want to look at our article about performing a Like-Kind Exchange. This could enable you to defer the capital gains tax. You could exchange for other types of real estate - it does not have to be a house for a house. You could exchange into land, apartments, or an office building. Replacement property could be any type of real estate within the US that is held for investment or for use in a trade or business.

I hope this information helps!