What Is the Capital Gains Tax Rate for Selling a Rental Property

In both examples, we assume that our investor`s total taxable income is $225,000 deposited jointly. This means it has a federal income tax rate of 24% and a capital gains tax rate of 15%. To be considered your principal residence, you must own and live in the home for at least two of the five years immediately preceding the sale. Let`s say you buy an investment property in 2010 and convert it into a principal residence in 2015. In other words, you moved in and called him in your home. In 2019, you can then sell the property as your primary residence because you have lived (and owned) there for at least two of the last five years. 4. Conversion of rental property into a principal residence Section 1031 of the Internal Revenue Code allows you to defer the payment of capital gains tax on rental properties if you use the proceeds of the sale to purchase another investment. You cannot avoid paying capital gains tax; Instead, you postpone it until you sell the replacement property. There are a few rules you should be aware of about exchanges under section 1031. First of all, it is a similar exchange, which means that the rental property you buy must be the same type of property as the one you sold. The good news is that the IRS allows for some flexibility in defining like-minded people.

So, for example, if you own a duplex and decide to sell it, use the product to buy a single-family home that might still meet the criteria for a 1031 exchange. The cost base is the price originally paid for your property plus any closing costs that need to be capitalized. The base can be adjusted by increasing or decreasing during the period of ownership of a rental property for investment purposes. When the property is sold, the adjusted base is used to calculate the amount of the capital gain. Any depreciation claimed in previous tax returns for this property must be recovered upon sale of the property. Contact your tax advisor for an estimate of how much you will have to pay. Adjusting the base of your rental property reduces the amount of tax due on the sale. “Most people can meet the requirements to exclude profits from taxable income,” says Mark Levine, director of the Burns School of Real Estate and Construction Management at the University of Denver. Selling a home you live in is more tax-efficient than unloading a rental property for profit. Section 121 of the IRS allows people to exclude up to $250,000 from the profits from the sale of their principal residence if they are single, and up to $500,000 if they are married and deposit together. To qualify, investors must have lived in their property as a principal residence for two of the five years immediately preceding the sale. The years as a personal residence do not have to follow one another.

For this reason, some investors choose to convert rental properties into their principal residences. If you want to sell an investment property – but don`t have to pay yet – you can defer the payment of capital gains tax by making a similar exchange. The easiest way to limit or avoid capital gains tax is to convert your investment property into your principal residence. The reason? If you sell a principal residence, you do not have to pay taxes on the entire profit. That`s because Article 121 of the IRS allows you to rule out the following: However, there are a few things to keep in mind if you intend to use this strategy: The second tax you need to plan for is depreciation recovery. As an investor, you probably already know that as long as you hold the property in your portfolio, you can write off the depreciation as an “expense.” However, if you sell the property, the Internal Revenue Service (IRS) will claim that money. The tax table has two dimensions when it comes to rental properties. First of all, there is the tax you pay on the rental income paid to you. And second, there are the taxes you could pay if you sold a rental property for a profit. You can deduct the cost from the selling price to determine your net income.

For example, if you sold your investment property for $300,000 and paid $18,000 in commissions and $4,000 in other costs, your net proceeds would be $278,000 ($300,000 minus $18,000 minus $4,000). For all gains that exceed the upper limit of your reporting status, you will typically pay the capital gains tax rate, typically 0, 15 or 20%, depending on your tax bracket starting in 2021. However, there are exceptions. For example, if you have to move because of a lost job or illness, you may not have to pay that tax, Levine said. If you lose money on the sale, tax laws won`t help you. Selling a rental property can result in a much higher tax liability than when you sold your principal residence. That`s because the IRS will view your rental property as a business investment and will try to recoup some of the benefits you received during the period you owned your income property. Essentially, this could reduce your capital gains tax bill to zero if you have enough investment losses to offset the gains. .