What’s my gain? Rental Property Edition.

In any property sale, the IRS is interested in gain or loss calculated from the adjusted basis and other factors related to the sale. The adjusted basis of the property is the original purchase cost plus improvements and less depreciation taken. A gain occurs when the selling amount is more than the adjusted basis, and a loss is when the adjusted basis (original cost) exceeds the sale price.

 

How to calculate the gain after the sale.

 

Let’s say you purchased a house in 2002 at a cost of $200,000.  Your intention was for this property to be a rental and you placed it in service immediately.  Over the years, you made improvements to the property at a total cost of $25,000.  These include kitchen and bathroom renovations and a roof.  During the life of this rental you took deprecation of $3600 per year.  In 2017, you decide to sell it.  The sale price was $500,000 with a cost of sale of $45,000.  What is your gain?

 

Item Amount
Sale Price $500,000
Less Cost of Sale $45,000
Adjusted Sale Price (Sale Price – Cost of Sale) $455,000
Original Purchase Price $200,000
Improvements $25,000
Depreciation Taken ($3,600/year @ 15 years) $54,000
Adjusted Basis (Original Purchase Price + Improvements – Depreciation) $171,000
Gain/Loss (Adjusted Sale Price – Adjusted Basis) $284,000

 

In this case, you would realize a gain of $284,000.  This gain would be taxed at the long-term capital gains rate, which depending on your tax bracket would be 15% or 20%.  The depreciation portion, of $54,000, will be subject to a special rate up to 25%.

 

Using the same example, lets change the Sale price to $205,000 and Cost of Sale to $35,000.

Item Amount
Sale Price $205,000
Less Cost of Sale $35,000
Adjusted Sale Price (Sale Price – Cost of Sale) $170,000
Original Purchase Price $200,000
Improvements $25,000
Depreciation Taken ($3,600/year @ 15 years) $54,000
Adjusted Basis (Original Purchase Price + Improvements – Depreciation) $171,000
Gain/Loss (Adjusted Sale Price – Adjusted Basis) -$1,000

 

In this scenario, you would incur a loss of $1,000.  Unlike personal property, losses taken on the sale of business and investment property are allowed on your individual tax return.  Depending on the attributes of the property the loss is considered an ordinary loss or a capital loss.  Ordinary losses are able to offset ordinary income on your tax return.  Capital losses are limited to $3000 of ordinary income reduction.

 

For more information on calculating gain or loss on the sale of any asset, contact the professionals at Grandfield Tax and Business Services, Inc. at 714-921-2790

2017-10-17T18:16:14+00:00