How to Pay Taxes for Selling Our Rental House
Paying taxes on the sale of a rental home requires a few simple calculations and some organization. To be successful, you need to have documentation showing how long you owned the home, how much you received for it and how much you originally paid for it. By following the instructions on Form 4797, you can properly calculate and characterize your gain or loss on the sale as well as include those amounts on your personal return.
Other People Are Reading
Instructions
-
-
1
Determine how long you held the property. This is important because it will determine how you characterize your loss.
-
2
Calculate your sales price. How much you sold your home for is the fair market value of all the cash and property received, as well as any debt that the buyer assumes on your behalf. This debt could be debt that the property was subject to or debt directly attributed to you.
-
-
3
Calculate your initial costs of purchasing the home. This includes how much you paid for the property as well as expenses you paid in acquiring the home such as closing and attorney fees.
-
4
Calculate all depreciation you have taken. Depreciation is a tax deduction that property owners can take, which reflects the "expense" derived from the wear of the property over the years. As there are several different rates to depreciate property by, double check your prior year returns to see exactly how much depreciation you took to ensure you achieve the correct result.
-
5
Calculate your adjusted basis. Subtract from the initial costs of purchasing the home your depreciation.
-
6
Calculate your total gain/loss. Subtract your adjusted basis from your sales price.
-
7
Complete Form 4797. If you owned the property for less than a year, complete part II of the form. If you owned the property for more than a year and had a gain, complete part III. If you owned the property for more than a year and had a loss, complete part I. This form will help tell you how to record the gains or losses on your personal return and whether to classify it as capital or ordinary.
-
8
Determine if you need to recapture any depreciation expense as ordinary gain. For some properties if you used an accelerated depreciation method, the tax code requires you to calculate the amount of the extra depreciation you took, deduct that from the proceeds of the sale, and include that amount in your total ordinary taxable income. However, only rental properties put into place prior to 1986 are required to go through this process.
-
9
Determine if you can exclude the gain. If you had a gain on the property, as of May 2011, you may be able to exclude up to $250,000 of it from taxes. If during the five year period ending on the date you owned the home, you lived in the home for at least two years and owned the home for at least two years, you qualify for the exclusion. To qualify, you cannot have used this exclusion on the sale of another home in the past two years.
-
1
Tips & Warnings
For complex returns, it is a good idea to consult with a certified public accountant (CPA) or licensed attorney, as they can best address your individual needs. Keep your tax records for at least seven years, to protect against the possibility of future audits. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.
