Rental Property How much

Selling Your Rental Property Intuit Home Intuit Products Support | Order Status | Shopping Cart Home Online Products Desktop Products Business Tips & Resources Sign In Automatic Renewal My Downloads Tax Tips & Topics Business Taxes Education & Taxes Employment Taxes Family & Taxes Homeowners & Taxes Investments & Taxes Retirement & Estate Taxes Tax Law & the IRS Tax Planning & Savings Tax Prep & Filing E-mail this Print this Selling Your Rental Property How much money am I going to make, after taxes, when I sell my rental property? Are you finally selling your rental property? Was dealing with that last tenant just more than you can stand to go through again? Did you just hear that the vacant land next to your property will be developed into a state college causing your rental property to realize a 10-fold increase in value? Are you approaching retirement and eager to liquidate your investment in order to travel the world, or just relax and take it easy? After finding a buyer and discussing a price, you may wonder what the sale will cost you in taxes and what your after-tax cash flow will be. Before you close the sale, then, you should figure out how much of your proceeds will go to Uncle Sam and how much you will be able to keep. You want to know how much cash you can expect to flow through your hands, after paying fees, costs, and taxes. How can I figure my gain ? Is my gain taxed as ordinary income or capital gain ? How do I report the sale ? What is my after-tax cash flow ? How Can I Figure My Gain? The amount you get for your rental property is the gross sales price. The first step in calculating your taxable gain is to figure out your net sales price. 1. Subtract All Your Selling Costs from the Gross Sales Price. You'll need a copy of your closing or settlement statement at hand to help you identify the costs involved in selling the property. But don't just assume that all costs on your closing statement can be considered selling costs . Pull out any rental expenses. Your closing statement may include items that were prepaid by you, such as property taxes, insurance, or homeowner's association fees. It may also include items that remain unpaid by you as of the sale date, such as rental deposits or property management fees. These items are ordinary and necessary rental expenses that you should report as part of your rental income or loss on Schedule E rather than as part of your property sale. After filtering out the rental items, add up all the selling costs; such as: Commissions on the sale Document recording costs Legal fees related to the sale Survey fees Title fees or costs Transfer fees Now, subtract your total selling costs from your gross sales price. The result is your net sales price. For example, if you have a total selling cost of $25,400, and your gross sales price is $550,000, your net sales price is $524,600. But how much of the net sales price is your profit, or taxable gain? 2. Subtract the Cost of the Property from the Net Sales Price. To figure your profit, or taxable gain on the sale, you need to subtract the cost of the property from the net sales price. But, naturally, adding up all your costs can take a little work. You need to know how much the property has cost you, starting way back when you bought it, and proceeding through the years as you made improvements (costing your more money), or took deductions for depreciation over the years (reducing your cost). The result is called your adjusted basis, because it has been heavily adjusted over the years, and it forms the basis of any calculation of profit or loss. (For more details, see The Tax Aspects of Selling Your Home . Subtract your adjusted basis in the property from the net sales price, to get your taxable gain. Example: Sally owns a rental property that she originally purchased for $320,000 (of which the portion allocable to land is $100,000), and over the years she has taken depreciation deductions of $115,667 for this property. She is considering an offer to sell the property for $450,000. She estimates that the selling costs will include real estate commissions of 6 percent and other costs of 1 percent of the sales price. Sally's net gain on the sale would be $214,167, calculated as follows: Gross sales price $450,000 Less selling costs at 7 percent 31,500 Net sales price $418,500 Less adjusted basis: Cost basis $320,000 Less depreciation allowed 115,667 Adjusted Basis 204,333 Net gain $214,167 Is My Gain Taxed as Ordinary Income or as a Capital Gain? When you sell a property you've owned for more than a year, the gain (the selling price less your selling costs and your adjusted basis in the property) is taxed at capital gains rates, which are lower than the regular income tax rates. The particular capital gains rate that's used depends on several factors. Most capital gains on sales of rental property are taxed at 15 percent but any gains due to depreciation you have already taken are taxed at 25 percent. Ordinary income, on the other hand, can be taxed with rates as high as 35 percent in 2004. Therefore, it's important to understand how much of your gain will be taxed at ordinary income tax rates and how much will be taxed at capital gains rates. Note: The tax rates addressed here are federal taxes rates only. Any state taxes that may also be due are in addition to the federal taxes. For Property Purchased in 1987 or Later If your property was purchased in 1987 or later: all of your gain will be considered capital gain, but there's a catch: while most long-term capital gains are taxed at a maximum rate of 15 percent, any portion of your gain that's attributed to any depreciation taken on your property is taxed at a special maximum rate of 25 percent. This applies to all depreciation taken on the property. (Note: Beginning in 1987, the only kind of depreciation you could take on the property was the straight-line method). Example: Continuing our example in the last section, Sally placed her rental property into service as a rental in 1988. She decided to depreciate her property on the straight-line basis over 27.5 years, so her total depreciation deductions from 1988 through 2003 amounted to $115,667. Of her $214,167 gain, $115,667 would be taxed up to the special 25 percent capital gains rate for depreciation and $98,500 would be taxed at the 15% capital gains tax rate. For Property Purchased Before 1987 If you acquired the property before 1987, the ordinary income portion of a gain on the sale of Section 1250 property consists of any additional depreciation taken on the property. Additional depreciation is accelerated depreciation that goes beyond what the depreciation would have been if it had been calculated using the straight line method. If your property was purchased before 1987 for residential rentals, additional depreciation on property acquired before 1987 is calculated for all years after 1975. For nonresidential rentals, additional depreciation is calculated for all years after 1969. The total additional depreciation (which is taxed at ordinary income tax rates) is deducted from the net gain in order to determine the amount of the gain subject to capital gains rates. This process is what's known as depreciation recapture. Essentially, because you were able to deduct depreciation expenses from ordinary income while you owned your rental property, you now pay the price at the time of sale: part of the gain on your property is taxed at ordinary income tax rates, in this case, your additional depreciation. Example: Joe purchased his rental property in 1985 for $320,000. He depreciated his property on an accelerated basis over 18 years, resulting in total depreciation deductions of $235,000. Had he used the straight-line method to calculate depreciation, his depreciation deduction would have been $229,000. Under the rules applicable to property purchased before 1987, his additional depreciation is $6,000. Assuming he sold his property for $418,500, of his $333,500 gain, $6,000 would be taxed at his ordinary tax rates and $327,500 would be taxed as capital gain. For more information see, FAQ on Capital Gains . Giving a Nod to Section 1231 Rental real estate, held for more than one year, falls under the definition of Internal Revenue Code Section 1231 and is therefore called Section 1231 property . A gain from the sale of section 1231 property can be either ordinary income to you (as a result of additional depreciation recapture if the property was purchased before 1987) or capital gain, or both. Section 1231 gains that are not subject to depreciation recapture (which is ordinary income) are long-term capital gains. Good news: If you have a loss on the sale of Section 1231 property, the loss is an ordinary loss, meaning that it reduces your ordinary income, not your capital gains income. Section 1231 gives you the best of both worlds, because gains are long-term capital gains (after depreciation recapture) and losses are non-capital, or ordinary, losses. How do I Report the Sale? You report the sale of a rental property on IRS form 4797: Sales of Business Property. The gross sales price, cost or other basis plus expenses of sale, depreciation allowed or allowable, adjusted basis, and total gain are all reported on Page 2, Part III, lines 20 through 24. If the property is Section 1250 property (which is just about any rental property), any ordinary income recapture is calculated on line 26. The capital gains portion of your gain is determined by subtracting the additional depreciation from the total gain. These amounts are carried to page 1 of Form 4797, where this capital portion is netted with other Section 1231 transactions. Transfer the net of Section 1231 transactions from page 1 of Form 4797 to Form 1040, Schedule D, Capital Gains and Losses. Put the ordinary income portion of your gain on line 14 of Form 1040, while your net capital gains from Schedule D are carried to line 13a of Form 1040. If your sale results in a loss, the entire loss is carried to line 14 on Form 1040 and is available to offset income from other sources. What is My After-Tax Cash Flow? Now that you have calculated your tax, you can calculate your net cash proceeds from the sale of the property. Enter your net sales price. Subtract any outstanding loan, to get a subtotal. Multiply the net gain (calculated in the previous example) by the capital gain rate of 25 percent on the part of the gain that represents depreciation and 15 percent on the rest of the gain. Subtract that figure from the subtotal, to see your net cash flow. Example: In our example, assume that Sally had decided she would not sell the rental property unless she could wind up with at least $200,000 cash after taxes and loan repayment. Assume she had an outstanding loan of $125,000 and other taxable income in her return. Her capital gains rates are affected by her other income. She calculates her after-tax cash flow as follows: Net sales price $418,500 Less repayment of the outstanding loan 125,000 Subtotal $293,500 Capital gains taxes at up to 25% & 15% $43,692 Net cash flow (before state taxes) $249,808 Based upon the above calculation, Sally would prefer to sell the rental property because her after-tax cash flow meets her requirements. Caution: Different states have different rules for taxing capital gains. Here, we have not considered the state tax impact. But, before making the sale, you should familiarize yourself with the state tax rules. If the property is located in a state other than your state of residence, it may be wise to study the rules of both the state in which the property is located and your state of residence, because both states may be very interested in your gain. For more on capital gains, see FAQ on Capital Gains . 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Statistics.com Courses: Real Estate Pricing and Financial Stability -- Login Register -- Join mailing list for course announcements Introductory Basic Concepts Intro Stats Data Mining Intro Data Mining Data Mining 2 Data Mining Security -- Decision Trees Text Mining Life Science Adaptive Trials Biostatistics Clinical Trials Fundamentals of Epi Bias in Epi Data Analysis of Epi Meta Analysis Microarray Analysis Survival Tox Risk Engineering Design Experiments Adv DOE Engineering Queueing Theory SPC Environment Directional Data Environmental Geostatistics Social Science Census GLM Longitudinal Data Rasch SEM Advanced SEM Survey Design Survey Analysis Business Derivatives Time Series Real Estate Special Topics Poker Probabilities Stat Methods Bayesian Statistics Categorical Cluster Analysis Count Data Logistic Regression Intro to R Mixed Models Modeling in R Resampling Adv Resampling Regression Sample Size S-PLUS Course Calendar View Full Course List Faculty Testimonials Tour a Course About our Courses Register Statistical Software Free Web-Based SQC calculators Online Consulting Discussion Boards Stat Terms Glossary Statistics Symbols Search Newsgroups Other Resources Certificates RSS Prep Statistics Jobs Online Printed Encyclopedia Tutoring Service Teachers Puzzles Homework Discussion Other Resources -- Real Estate Pricing and Financial Stability Instructor to be Arranged [preliminary information - this course is in development] Course Cost: $399 commercial ($299 academic) if pre-paying online via credit card or via check sent with our printed order form. $449 per participant ($349 academic) if you need us to invoice you, process a purchase order, process a wire transfer, or process an EFT. 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5 Steps To Successful Real Estate Investing Add URL RLROUSE Directory & Informational Resources Site Map Home Add URL SEO Toolkit SEO Blog Webmaster / SEO Info Featured Stores Featured Text Listings Birdhouses Birdfeeders Great Recipes Articles -> Personal Finance -> Birding -> Crafts -> Lawn & garden -> Webmaster -> PC technology -> Steps to success -> Travel -> Your health -> The 50 US States -> Bluegrass Music -> Picture of the day -> Submit article Freebies Privacy policy Contact us Link to us Newsletter About us Recommend Advertise with us Site map 5 Steps To Successful Real Estate Investing Effective real estate investment strategies As the stock market continues having its ups and downs, more and more investors are looking for alternatives. Often they turn to real estate investing , the "safe" place to invest their money. But not so fast! Sadly, the majority of real estate investors have received little useful information and/or bad real estate investment advice. They jump right in and work extremely hard, only to lose most or all of their huge investment. "Real estate investing isn't a one-size-fits-all proposition, so it's wise to lay a good foundation before laying down your cash," explains Vena Jones-Cox, also known as the "Reliable Real Estate Expert". Over the years, she has compiled this series of steps that every real estate investor should follow: Join a Real Estate Investment Association There is no book you can read, no course you can take, and no experience you can acquire on your own that can even come close to the real estate education you'll get by spending time around people who are already buying, selling, and managing properties. The successes and failures of real-life real estate investors will teach you more (and motivate you more) than even the most complete classroom education you can find. Decide what you want in regards to your real estate investing No, that doesn't simply mean "I want to buy properties." Buying properties is simply a way to achieve your actual goals: quick cash, increased cash flow, retirement income, tax advantages, etc. Setting realistic goals for your real estate business at the outset allows you to concentrate on the properties, areas, sellers, and exit strategies that are most likely to meet those goals. Decide which real estate investment strategies will get you there most efficiently There are only five basic real estate exit strategies to choose from: retail, wholesale, lease/option, sell with owner financing, and rent. Once you have decided what you want to do (refer to step 2), your choice of exit strategies will suddenly be pretty limited. For instance, if your goal is wealth building or passive income, the retail and wholesale strategies won't work for you. If you need fast cash to pay off consumer debt or build capital for long-term investments, renting properties is the wrong way to achieve this goal. Your available real estate strategies will also be limited by your education, personality, and available assets. By the time you closely examine your goals, assets, and liabilities, you should be able to decide upon a single strategy for buying and making money from real estate properties. Determine and acquire the knowledge and skills you'll need to make your real estate investment strategies work Any basic book on a particular real estate investment strategy will show you the skill set you'll need in order to make money using that strategy. You don't need to know how tenant-landlord law works or how to manage properties if you plan to retail or wholesale, but if your strategy is to rent or lease/option, these are extremely important to know. On the other hand, some skills are vital no matter which real estate investment strategy you use. These skills include the ability to determine the value of properties, find motivated sellers, negotiate with sellers, and put your offer together. Make a list of the things you'll need to learn in order to make your strategy work, then figure out how you're going to get that information. There are endless books, workshops, home-study courses, and videotapes about virtually any real estate related topic you can imagine. Once you know what information you need, finding it will be no problem. Make lots of offers, even before you're really sure you know what you're doing Vena has taught a lot of classes to lots of new real estate investors, and she's discovered something interesting: those who haven't spent some time actually practicing looking at properties, evaluating them, and making real offers have very unrealistic ideas about what's going to happen when they do. Most beginners have preconceived ideas about the objections sellers will pose to their offers that bear no actual relationship to the objections they ultimately end up raising. They have fears about not being able to find or evaluate comparable properties. They think they'll miss the repairs the properties need when in fact they are usually fairly obvious. In a nutshell, until you've actually gotten your feet wet in the real estate market, you simply don't know what you don't know. You can't make money in real estate without making real offers, and you'll never acquire the knowledge you need to become a successful real estate investor until you get the real-life experience that only comes from making offers. The more quickly you take the steps above, even if you aren't sure you know what you're doing, the faster you'll move from a wannabe to a real-life real estate investor! About the author: Vena Jones-Cox, also known as the "Reliable Real Estate Expert," is a frequent lecturer at real estate investment groups throughout the country. She also hosts the popular weekly call-in public radio program "Real Life Real Estate Investing." Visit her at www.REGoddess.com . More Interesting Articles Elib Directory : devoted to Internet Commerce. 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