what are hidden costs when selling a rental property.

[Chelle Knijnenburg]

I was told that when a rental house is sold, we would have to "pay back" costs like replacing hot water heaters, HVAC, replacing carpet, painting, etc. that we previously used against income from the rental business and a profitable pet/house sitting business.

I am confused by this and not even sure I am asking in the correct forum. Any guidance would be appreciated.

[Linda Weygant]

It can make a lot of sense to sell a rental.  Here's how it works:

You buy a house for $275,000 and hold it for 5 years.  Depreciation on this is $10,000 per year, so your depreciation is $50,000.

You sell the house for $350,000.

Your basis is now $275,000 - $50,000 = $225,000 so your total profits are $125,000.

Of that $125,000, $50,000 is depreciation recapture and $75,000 is capital gains.

If you're in the 25% tax bracket, then you pay tax on the $50,000 at 25% or $12,500.

The capital gains taxes are 15%, so you pay $75,000 at 15% or $11,250.

So you've profited $125,000 and paid $23,750.00.  You walk away with $101,250.