As with any significant transaction, the sale of rental real estate will have income-tax consequences you’ll want to understand ahead of time. As a trusted Houston CPA Firm that specializes in accounting and tax services for the real estate industry, Polk CPA Firm can help.
Although much will depend on the details of your specific situation, here are some key concepts to keep in mind.
Gain or Loss?
Figuring gain or loss for tax purposes involves comparing the amount realized on the sale to your “adjusted basis” in the property. Generally, your adjusted basis is equal to the amount you paid for the property, plus the cost of any improvements you made and minus depreciation deductions.
The tax law requires you to net your gains and losses from the sale of rental and business property held longer than one year against each other. If the result is a net gain, it generally will be taxed as long-term capital gain, except to the extent that special rules regarding prior depreciation and losses can result in less favorable treatment. If the netting process results in a net loss, you may deduct it in full against your ordinary income.
Potential Tax Benefit
You may have losses from renting the property that you weren’t allowed to deduct in previous years because of the “passive loss” rules. Those suspended losses generally will be deductible in the year you sell your rental property.