Capital Gains Tax On Sale Of Rental Property – Rates and Rules!

Working Out Your Gain

August 18, 2004
By Niles Brohey

Capital gains tax on rental properties can be difficult to understand at best, but by following these simple steps you can figure your taxes relatively simply. Firstly its important to note that any gain on sale of rental property is eligible for taxation and also that the rules governing this taxation vary to an extent from state to state. The first step in working out your payable tax is to work out your gains.

The only obvious figure you'll have to start with is the gross sum you received for your property – how much you were payed for it. However what we are interested in from a tax point of view is your net sales price. First begin to add up your selling costs: costs such as commissions on the sale, legal fees relating to the sale, surveying costs etc. Do not include costs related to rent in these selling costs, sums which you owe at the time of sale such as rental deposits or property management fees, these are ordinary rental expenses and are not pertinent to calculating your capital gains.

Take your total sales costs (as outlined above) and subtract them from your gross sales price, the result is your net sales price. So if your property sold for $300,000 and your selling costs were $50,000 then your net sales price is $250,000.

To calculate your net gain you must now calculate the cost of your property, in general this involves taking what the property originally cost you and subtract from this any depreciation on the property which has occurred in the meantime. The result is your properties cost or as it is called - your adjusted basis.

Your net sales price minus you property cost is your net gain – the amount on money you have earned on the sale. This figure is what is taxed. The tax rate that is charged largely depends on whether your net gain is taxed as income or capital gains. This is largely determined by when you purchased you property.

On property purchased in or after 1987 all your gain is taxed at the normal capital gains rate with one exception – an amount equal to the depreciation your property has incurred is taxed at a special depreciation capital gains tax rate, which has a maximum rate of 25%.

On property purchased before 1987 the situation is similar to that purchased after 1987, the difference is that a special depreciation figure termed additional depreciation is taxed at your normal income tax rate.