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#### Calculating Gain on Sale of Rental Property

Crucial Tax Tips for Landlords, #7
Calculating the gain or loss on a sale of rental property is a very simple calculation, and understanding it will result in you saving thousands of dollars in taxes.
Be sure to account for selling costs and improvements to reduce your gain.
Many investors forget to do that.

1. First, determine your selling costs. There is a great tip about accounting for all selling costs and you can read it here:

Assuming you sold a property for \$200K and you paid 6% commission (\$12K) plus other closing costs that added to \$6K, your selling costs are

\$18K (Selling Costs) = \$12K (Commission) + \$6K (Closing costs)

2. Second, you calculate the adjusted cost basis of your property. A simple formula for calculating adjusted cost basis is
Adjusted Cost Basis = Purchase price “ Depreciation + Improvements

Assuming that you had bought the property for \$95K and paid closing costs of \$5K that you added to increase the basis, your purchase price is \$100K.

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There is a tax tip about increasing the basis of the property for depreciation by accounting for all closing costs and maximizing your cash flow. You can read it here:Go and look up the depreciation that you have taken on your tax return for this property and the improvements done to the property. Assume in this case you had taken \$30K of depreciation and have done \$10K of improvements.

The adjusted cost basis of this property is:

\$80K (Adjusted Cost Basis) = \$100K (Purchase Price) – \$30K (Depreciation) + \$10K (Improvements)

3. Third, the gain or loss on the sale of this invest property is calculated using the formula:

Gain or Loss = Sale Price “ Selling Costs “ Adjusted Cost Basis
In this example the gain is:
\$102K (Gain) = \$200K (Sale Price) – \$18K (Selling Costs) – \$80K (Adjusted Cost Basis)4. Finally, the amount taxed at capital gains rate of 5% or 15% is calculated by subtracting depreciation from gain:
\$72K Taxed at Capital gains rate of 5% or 15%
\$30K Depreciation (Generally taxed at 25% rate)In this example, an investor pays \$11,100 (if 5% capital gains tax rate) or \$18,300 (if 15% capital gains tax rate) in taxes on a \$102K gain. By accounting for all selling costs and improvements, the investor saved from \$3K to \$5K in taxes depending upon their tax bracket.

For more Tax Tips and FREE Property Management Software for real estate investors, check out TReXGlobal.com.

Did you miss these tax tips:
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• Andy

Assuming that the property in
your example was in Mixed Use: 50% personal 50% Rental. How do you proceed with calculating

Capital Gain tax and Depreciation Recapture Tax in this case, how to deal with
Property sale value, Capital Improvements cost, etc.

IRS states that the rental part must be treated as a separate property but did
not provide example how to calculate Capital Gain tax or Depreciation Recapture
Tax in this case.

So, according to IRS logic the amount of Capital Gain tax and Depreciation Recapture Tax in this case should be just 50% of the taxes for 100% rental use
property …