Today, it’s a great time to sell since the average home price has increased by 32.6%. It’s a seller’s market and this trend might not last for long.
If you’re looking to take advantage of the current market, you might be wondering about the tax on selling rental property. Read on to explore more about taxes on rental property and ensure that there are no surprises going forward.
What Are Capital Gain Taxes?
If you don’t use sell my property for cash fast then you might wind up paying a capital gain tax. This is when you don’t sell a property within a year.
If you have short-term gains they’re taxed as ordinary income. For long-term capital gains, the tax rates are lower.
If you hold a home before you sell a property for the long-term, then the IRS will try to recapture the annual non-cash depreciation.
In order to avoid this tax, you’ll want to use the 1031 Tax Deferred Exchange. This is when you’re selling investment property and buying a property that’s of equal or of a greater value.
If you’re looking to cash out fast then you’ll want to be mindful of the capital gain taxes. Your best bet is to calculate the different taxes depending on the value of your property in order to avoid surprises.
You’ll also want to include local and state taxes depending on your location. States might require you to have a withholding tax depending on the value of the sale.
The Cost Basis
A cost basis is the original amount that you paid for the property. This includes closing costs that have to be capitalized as well.
The basis can vary depending on the decrease or increase when a rental property is in the investment stage. Once you’re done selling investment property then it’ll be adjusted. This will determine your capital gain amount.
Basis increases occur because of:
- Appraisal or inspection fees
- Assessments that can increase the property’s value
- Real estate commission
- Improvements or additions
Basis decreases occur due to:
- The amount from granting an easement
- Theft loss or casualty
Calculating Taxes Yourself
When you’re ready to calculate taxes, you’ll first take the cost basis which can include the assessment, purchase price, plus closing costs. Next, you’ll want to take into account the value of the land and the cost basis for depreciation.
Depreciation expenses include the annual depreciation and total depreciation expenses. You’ll also want to include the adjusted basis and capital gains.
Understanding Tax on Selling Rental Property
After exploring this guide, you should better understand the tax on selling rental property. Take your time deciding if now is the right time for you to sell, and how much taxes will cost you.
Would you like to read more informative content? Check out our other articles on our site today. From up-to-date and educational how-tos to informative guides, we have you covered.