Tax liability when selling investment property

Member since 2023 · 5 posts · 1 vote

I have basic question that I'm still unclear on. I'm looking to sell my first SFH, which I've owned and rented for 17 years, for a profit. I'm unsure of the tax liability/taxable gain due after the sell. This will determine if I will a 1031 exchange or not.

Is the taxable amount a) the profit or difference between the purchase and sell price, b) the cumulative net gain over the time owned or c) something else

looking to roll into larger SFH or Multi. Thanks!

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Austin Cheatham

Accountant · Louisville, KY · Member since 2020 · 75 posts · 55 votes

So the taxable amount would be:

Sales price

Add: any improvements capitalized

Less: original purchase price

Less: any depreciation taken

So let's say you had a house you bought 17 years ago for 100k. You remodeled it at some point and added a new roof and HVAC system and that was all in for 50k. So now we're all in total basis of 150k. Over those 17 years we took depreciation on all of this things, and across those 17 years lets say we took 75k in depreciation. Now our basis in our house is 150k purchase and improvements less 75k depreciation. So basis is now 75k. That house sold for 200k. Your taxable gain would be the 200k-75k=125k. You would have depreciation recapture on the items you depreciated (75k), taxed at ordinary income rates and then any of the actual property appreciation would be taxed at favorable capital gains rates (50k).

1031 exchange will allow you to defer all of that gain as long as you meet conditions.

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Malcomb StapelPro Member
Investor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
1y
@Mark A. McElhannon
Sales price - (purchase price+ expenses) then multiply by long term taxable gains rate.
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Austin Cheatham
Accountant · Louisville, KY · Member since 2020 · 75 posts · 55 votes
1y
So the taxable amount would be:
Sales price

Add: any improvements capitalized
Less: original purchase price
Less: any depreciation taken
So let's say you had a house you bought 17 years ago for 100k. You remodeled it at some point and added a new roof and HVAC system and that was all in for 50k. So now we're all in total basis of 150k. Over those 17 years we took depreciation on all of this things, and across those 17 years lets say we took 75k in depreciation. Now our basis in our house is 150k purchase and improvements less 75k depreciation. So basis is now 75k. That house sold for 200k. Your taxable gain would be the 200k-75k=125k. You would have depreciation recapture on the items you depreciated (75k), taxed at ordinary income rates and then any of the actual property appreciation would be taxed at favorable capital gains rates (50k).
1031 exchange will allow you to defer all of that gain as long as you meet conditions.
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Mark A. McElhannon
OP
Member since 2023 · 5 posts · 1 vote
1y
Wouldn't all the other 17 years of expenses (taxes, maintenance, fees, etc) also be deducted from the price and not just depreciation?
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Jackson Hanssen
Member since 2024 · 39 posts · 36 votes
1y
Quote from @Mark A. McElhannon:

Wouldn't all the other 17 years of expenses (taxes, maintenance, fees, etc) also be deducted from the price and not just depreciation?

No, those expenses would be deducted in the years they occurred unless you've made an odd election to capitalize them.
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Jackson Hanssen
Member since 2024 · 39 posts · 36 votes
1y
In answer to your original question, you'll need to run specifics on your total taxable gain and the character of the gain, 1250 recapture or capital gains. Then you'll need to review your personal tax characteristics to determine how much tax you'd have to pay on that gain. Then you can do a full comparison.

Generally if you're buying another real estate asset, and you qualify, you should always be 1031'ing.
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Austin Cheatham
Accountant · Louisville, KY · Member since 2020 · 75 posts · 55 votes
1y
Quote from @Mark A. McElhannon:

Wouldn't all the other 17 years of expenses (taxes, maintenance, fees, etc) also be deducted from the price and not just depreciation?

Nope! Usually taxes, maintenance, and fees are deducted in the year they occur. You could have made the choice to capitalize them but likely not. I'd check with your accountant on that to see where your basis is at. He should have that information from your return. It may also be in your tax return. Sometimes those schedules are included but sometimes they're not.
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Malcomb StapelPro Member
Investor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
1y
@Austin Cheatham I knew I was forgetting something in there, depreciation recapture :(
Thank you!
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
1y
Have a chat with your accountant to see what the gain and tax consequences are.
Once you know what the tax consequences are, you will know whether a 1031 exchange is a good fit.

Your gain = Sales price less costs to sell less adjusted Basis.
Adjusted basis = purchase price + improvements - accumulated depreciation.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y
@Mark A. McElhannon To figure out what your net gain is you want to find out what your adjust cost basis, minus what your net sale would be. It's easier to break these up into two sectors to help simplify the breakdown process.
Adjust cost basis - Is the purchase price, plus capital improvements, minus depreciation.
Net Sale - Is the contract price, minus the closing costs and commissions.
(adjust cost basis - net sale = net gain)
Once you have that you can deduct state and federal taxes from that figure.
It doesn't sound like it in this scenario, but if you have lived in the property for two out of the previous five years you could qualify for the 121 exclusion. Allowing you to take the first $250k ($500k if married) of the gain tax free. This would also make a big difference when calculating your net gain.
Otherwise, if it qualifies, you could do a 1031 exchange. Allowing you to defer all of the tax, as well as not have to recapture any depreciation. Instead using the tax to work in your favor to purchase larger nicer property/properties.
In order to defer all tax you must purchase at least as much as your Net Sale
(contract price, minus the closing costs and commissions) and use all of the Net proceeds (the net sale, minus any mortgage payed/ Equity in home being sold).

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Christopher Robert Noland
Investor · Seattle, WA · Member since 2023 · 87 posts · 44 votes
1y
The taxable gain on the sale of your single-family home (SFH) will generally be the **difference between the selling price and your adjusted basis in the property**. Here's a breakdown:

1. **Adjusted Basis**: This is the original purchase price of the home, plus the cost of any improvements you made over the years, minus any depreciation you claimed while renting the property.

2. **Taxable Gain**: The taxable gain is calculated by subtracting the adjusted basis from the selling price. Essentially, it's the difference between what you paid (adjusted for improvements and depreciation) and what you sell the property for.

3. **Depreciation Recapture**: Because you've rented the property, you likely claimed depreciation, which reduces your basis. When you sell, this depreciation must be "recaptured" and is taxed at a higher rate, typically 25%.

So, the taxable amount is **the difference between the sale price and your adjusted basis**, including depreciation recapture.

If you're concerned about tax liability, a **1031 exchange** could allow you to defer capital gains taxes if you roll the proceeds into another like-kind property (such as a larger SFH or multifamily property). This is a good option if you're looking to reinvest and defer the tax hit.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y
@Christopher Robert Noland, Great synopsis. @Malcomb Stapel one other thing about depreciation is that it is not optional. You will be faced with recapture of depreciation that you either took or could have taken!!! One more great reason to have a great accountant guiding you like these folks posting above!!
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