Selling your Rental Property? Consider These Factors First
A client comes in and hands us a settlement statement from a Sale of Rental on a house. They had to take $5,000 to closing and were upset because of the money they lost on the rental. To make matters worse, we had to deliver the unfortunate news that not only did the client lose that $5,000, they now also have a taxable gain on the sale of the property.
How do I know if I have a gain or not? How do I calculate depreciation? You might be wondering. Great questions! Depreciation can become complicated but that’s part of a CPA’s job. We understand how the IRS calculates depreciation and can work that in your favor. We can also advise you on whether or not you will have a taxable gain and figure this out through income tax projections, which if you have been following these articles, you will have seen us mention them several times before. The reason for this is that income tax projections are like hindsight, but better, because instead of making a decision and then learning of the consequences (or benefits,) we can predict the depreciation on your rental property and determine if you will have a gain or a loss on the property.
The information we learn from the income tax projection might show that it is wiser to keep your rental property, or if you still decide to sell the rental property and will have a gain on it, it can at least prepare you for the tax liability you might incur. The bottom line is that if you are considering selling your rental property, we recommend calling our office at 813-514-8273 to schedule an appointment so we can help you. We all hate unfortunate surprises so don’t let yourself be caught off guard and come in to see us today.
Would you like more information on this topic? If so, continue reading for a more in-depth explanation. Disclaimer: the following content might be very technical and bore you to tears. Before reading on, Kevin asks that you please do not operate any heavy machinery after reading the rest of this blog post. Ready? Here goes.
After the client learns they have a taxable gain on the sale of their property, they think, Gain? How could there be a gain when I lost money on the rental? Well, there is this little pesky thing called depreciation. Have you ever bought a car and then sold it several years later but didn’t get what you paid for it? That’s because items depreciate (lose value) over time. Cars depreciate and so do houses due to things such as wear and tear as well as other factors. Therefore, a house that was once worth $200,000 will be worth less when it’s sold at a later date but that doesn’t mean it sold for less.
Let’s take a look at an example:
When the market crashed in 2008 and property values fell, you decided to purchase a rental property for $200,000 as an investment. Now, in 2018 you decide to sell that same property and manage to get $200,000 for it. That’s great, right? You broke even on the house AND you received those ten years of rent. What a wise investment! Unfortunately, that is not the case. See, over those ten years, the house depreciated a bit each year, so even though you managed to sell it for $200,000, the house was, let’s say, only valued at $160,000. That means you have a capital gain of $40,000 on the house, and you guessed it, the IRS wants their cut of your gain too.
We do our best to mitigate the IRS’ cut because we want to save you money, so please call our office at 813-514-8273 to schedule an appointment and allow us to make your life less taxing!