Pls help to figure out how tax from sale is calculated

Phoenix, Arizona
Tax, SDIRAs & Cost Segregation
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Pls help to figure out how tax from sale is calculated

Mary Jay
Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes

Hi guys,

So Ive been thinking to sell one of my rentals. It has not much of equity in it because I took out a private loan (second mortgage from my ex boyfriend. At the time I took the loan out he was my boyfriend, then we split). I want to sell it, and I dont want to do a 1031 exchange on it. But I am trying to figure out how much will the tax be. If its too much, I might need to do a 1031 exchange...

For the simplicity of calculations, lets pretend I dont have to pay any real estate commission....

1) So I purchased it for 230K in the end of 2011, then refinanced it during Covid (in 2020) and pulled some equity from it, and owe now 250k on it... 

Then I had to take a second loan from my then boyfriend a year ago, and my loan to my ex is 300k, which Ive been paying but did not pay off much...

So total I owe on the house is 550k ( 250K to the bank+300K to my ex boyfriend)

The house is worth 700k...It was always a rental.

If I sell it now, lets say I sell it for 700k... How will the tax that I owe to the IRS calculated?

will I be paying taxes on:

1) 700k (sell price) - 230k (what I purchased the house for in 2011)= 470K, so my tax burden will be 235k?

or

2) 700k (sell price) - 550K (250k 1st lien that  I owe to the bank + 2nd lien that I owe to my ex 300k)=150K of the profit that I make will be taxed. 75k of tax I will have to pay to the IRS...

Which scenario is correct?

Thank you so much!!!  

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
1y
Quote from @Dave Foster:

@Mary Jay , You are probably looking at tax on a lot more than $235K. The profit calculations would be your adjusted cost basis (purchase price, plus capital improvements, minus depreciation), subtracted from the net sale of the property (sales price minus closing costs and commissions), like others mentioned above.

It doesn’t matter how much you owe on your loans. So, you’ll be taxed on the gain between your purchase price and your sale price, not the amount of cash you walk away with. You're looking at a bunch of depreciation recapture (all of the depreciation taken since 2011 - depreciation could be well over 100K by itself), and you pay 25% on that. So, it would probably be worth your while to do a 1031 exchange.


Feels weird to disagree with my good friend, but this time Dave is incorrect.

You do not pay 25% on the depreciation recapture. You pay no more than 25% but possibly a lot less. Which is why I keep saying: it is all case-by-case.

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  • William WhitleyBusiness Member
    Accountant · TN · Member since 2025 · 146 posts · 92 votes
    1y

    @Mary Jay 

    While I can’t tell you exactly how much your tax will be, I can help clarify how the gain is generally calculated.

    When you sell a rental property, your taxable gain is based on the difference between your sale price and your adjusted basis; not on how much you owe on the mortgages.

    Your adjusted basis starts with your purchase price, plus certain closing costs (if they weren’t deducted previously), plus the cost of any capital improvements you’ve made over the years (like renovations or additions).

    The gain is your sale price minus that adjusted basis.

    From that gain, you’ll also have depreciation recapture, meaning the total depreciation you’ve taken (or should have taken) while the property was a rental is taxed separately. The remaining gain, after subtracting the recapture portion, is treated as a long-term capital gain if you’ve held the property over a year.

    So, in short: 

    • The amount you owe on your loans doesn’t affect your gain or taxes.

    • The taxable gain is based on your adjusted basis, not your equity.

    • You’ll pay tax on depreciation recapture and on any remaining capital gain.

    It might be worth having a tax pro run the exact numbers since even small details (like improvements or refinance costs) can shift the outcome.

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  • Mary Jay
    OP
    Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes
    1y

    Thank you!
    I understand better when I have numbers in front of me.

    For simplicity, lets say there was no depreciation and no realtors fees.


    So

    lets say that the purchase price was 200K and I put in 10k of money for

    remodel into it, sold for 250K so my taxable portion is going to be

    40K? correct?

    0Reply
    • William WhitleyBusiness Member
      Accountant · TN · Member since 2025 · 146 posts · 92 votes
      1y

      @Mary Jay 

      Although that is a simplified example, that is basically how it works. However, as @Mason Weiss said, you really want to talk to a CPA that can give you more accurate information based on your specific tax situation. Even if you know your capital gain and your accumulated depreciation for this property, the tax implications goes beyond the property itself. Your other income sources and amounts can also impact the tax amount like tax brackets, etc. 

      You really can't make an informed decision without all the information, and that will require a consultation with a CPA whom will likely need additional information. 

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    • Denise SuppleeBusiness Member
      Realtor · Willow Grove, PA · Member since 2017 · 1k+ posts · 666 votes
      1y
      Quote from @Mary Jay:

      Thank you!
      I understand better when I have numbers in front of me.

      For simplicity, lets say there was no depreciation and no realtors fees.


      So

      lets say that the purchase price was 200K and I put in 10k of money for

      remodel into it, sold for 250K so my taxable portion is going to be

      40K? correct?

      Your taxable gain would be the sale price ($250K) minus your adjusted basis (purchase price $200K + $10K improvements = $210K), so $40K is correct. That $40K would be your capital gain, assuming no depreciation or selling costs.
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    • Mary Jay
      OP
      Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes
      1y
      Quote from @Denise Supplee:
      Quote from @Mary Jay:

      Thank you!
      I understand better when I have numbers in front of me.

      For simplicity, lets say there was no depreciation and no realtors fees.


      So

      lets say that the purchase price was 200K and I put in 10k of money for

      remodel into it, sold for 250K so my taxable portion is going to be

      40K? correct?

      Your taxable gain would be the sale price ($250K) minus your adjusted basis (purchase price $200K + $10K improvements = $210K), so $40K is correct. That $40K would be your capital gain, assuming no depreciation or selling costs.

       
      Thank you all!
      Denise, can I roll the proceeds into a self directed IRA?

      0Reply
    • Michael PlaksPro Member
      Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
      1y
      Quote from @Mary Jay:

       
      Thank you all!
      Denise, can I roll the proceeds into a self directed IRA?

      Mary Jay, please get yourself a tax professional.
      You hear all these concepts but to make sense of them you need to get the big picture. 

      No such thing as rolling proceeds into a retirement account and avoiding taxes in the process. However you may be able to contribute to retirement accounts and slightly mitigate the tax impact from a sale.

      1Reply
    • Mary Jay
      OP
      Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes
      1y
      Quote from @Michael Plaks:
      Quote from @Mary Jay:

       
      Thank you all!
      Denise, can I roll the proceeds into a self directed IRA?

      Mary Jay, please get yourself a tax professional.
      You hear all these concepts but to make sense of them you need to get the big picture. 

      No such thing as rolling proceeds into a retirement account and avoiding taxes in the process. However you may be able to contribute to retirement accounts and slightly mitigate the tax impact from a sale.


      I will, of course.
      Before going to a tax specialist I would like to have a general idea of the options that I have, if there are any.
      People on this forum are super smart and know what they are talking about...
      1Reply
    • Denise SuppleeBusiness Member
      Realtor · Willow Grove, PA · Member since 2017 · 1k+ posts · 666 votes
      1y
      Quote from @Mary Jay:
      Quote from @Denise Supplee:
      Quote from @Mary Jay:

      Thank you!
      I understand better when I have numbers in front of me.

      For simplicity, lets say there was no depreciation and no realtors fees.


      So

      lets say that the purchase price was 200K and I put in 10k of money for

      remodel into it, sold for 250K so my taxable portion is going to be

      40K? correct?

      Your taxable gain would be the sale price ($250K) minus your adjusted basis (purchase price $200K + $10K improvements = $210K), so $40K is correct. That $40K would be your capital gain, assuming no depreciation or selling costs.

       
      Thank you all!
      Denise, can I roll the proceeds into a self directed IRA?

      You can however you have to make sure to put the funds directly into the IRA without taking personal possession and avoid any "prohibited transactions." I should also say that I am not a tax specialist I just have a lot of knowledge on this.

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      0Reply
  • Mason WeissBusiness Member
    Realtor · Phoenix, AZ · Member since 2021 · 536 posts · 246 votes
    1y

    I would highly recommend connecting with a licensed tax professional who can accurately talk through your sale of this property. I have a few who I can recommend if you are interested. You could also reach out to the accountant/CPA who has been filing your taxes for advice. There are plenty of moving parts and a non-licensed individual can't provide specific tax advice.

    [email protected]480-818-7745
    1Reply
  • Denise SuppleeBusiness Member
    Realtor · Willow Grove, PA · Member since 2017 · 1k+ posts · 666 votes
    1y

    Hi @Mary Jay, The IRS doesn’t base your taxable gain on how much debt you owe; it’s calculated from your adjusted basis in the property.

    Your basis starts with what you paid, plus any major capital improvements, minus total depreciation claimed (or claimable) over the years. The mortgages..whether from a bank or private lender, don’t affect that calculation.

    So, if you sell for $700K, your gain = $700K – adjusted basis, regardless of the $550K owed. You’ll then pay capital gains tax on that amount (and depreciation recapture on what you’ve depreciated).

    If the tax hit looks large, you could look at timing strategies, partial 1031s, or rolling proceeds into a passive deal like a syndication to keep your capital working. But from a tax standpoint, the debt itself doesn’t reduce your gain.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    1y

    @Mary Jay

    Your desire to know the numbers is totally valid. Unfortunately taxes do not work this way, you cannot just get a good estimate from your numbers. Even if you apply the general principles mentioned on this thread, the answer also depends on a lot of other factors, such as your overall income, potential suspended losses and so on.

    Sorry, the only reliable estimate can come from a tax professional asking you a bunch of questions, looking at your past tax returns and running your numbers through software. The ballpark estimates can turn out to be completely wrong. 

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Mary Jay , You are probably looking at tax on a lot more than $235K. The profit calculations would be your adjusted cost basis (purchase price, plus capital improvements, minus depreciation), subtracted from the net sale of the property (sales price minus closing costs and commissions), like others mentioned above.

    It doesn’t matter how much you owe on your loans. So, you’ll be taxed on the gain between your purchase price and your sale price, not the amount of cash you walk away with. You're looking at a bunch of depreciation recapture (all of the depreciation taken since 2011 - depreciation could be well over 100K by itself), and you pay 25% on that. So, it would probably be worth your while to do a 1031 exchange.

    The 1031 Investor5140 Reviews
    WebsiteView Page
    0Reply
    • Michael PlaksPro Member
      Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
      1y
      Quote from @Dave Foster:

      @Mary Jay , You are probably looking at tax on a lot more than $235K. The profit calculations would be your adjusted cost basis (purchase price, plus capital improvements, minus depreciation), subtracted from the net sale of the property (sales price minus closing costs and commissions), like others mentioned above.

      It doesn’t matter how much you owe on your loans. So, you’ll be taxed on the gain between your purchase price and your sale price, not the amount of cash you walk away with. You're looking at a bunch of depreciation recapture (all of the depreciation taken since 2011 - depreciation could be well over 100K by itself), and you pay 25% on that. So, it would probably be worth your while to do a 1031 exchange.


      Feels weird to disagree with my good friend, but this time Dave is incorrect.

      You do not pay 25% on the depreciation recapture. You pay no more than 25% but possibly a lot less. Which is why I keep saying: it is all case-by-case.

      2Reply
  • Rohullah Sharifi
    Dr · VA · Member since 2025 · 154 posts · 35 votes
    1y

    If you are single, you may exclude up to $250,000 of gain from the sale of your primary residence. If you are married and file jointly, the exclusion increases to $500,000. Any gain exceeding these limits is generally subject to long-term capital gains tax, provided the property was held for more than two year out of five.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    I bow to the Ring master - @Michael Plaks ! But I did use the word "bunch" which is an industry (lol) term that allows for some variance in the actual number :). You keep me on my toes Michael.  Which is why I love you!

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    The first scenario is closer to how it actually works.

    When you sell a rental, your taxable gain is based on the sales price minus your adjusted cost basis, not how much you owe on the mortgages. The IRS doesn’t care about your loan balances.

    So if you bought it for $230K, your adjusted basis would be the purchase price plus any capital improvements you made, minus any depreciation you’ve taken (or should have taken) since 2011. The refinance and private loan don’t change your basis, they just change how much cash or debt you have, not the taxable gain.

    If you sell for $700K and your adjusted basis is still roughly $230K (or a bit less due to depreciation), your gain will be around $470K. Of that, the portion of depreciation you’ve taken is taxed at a maximum 25% rate (depreciation recapture), and the rest is long-term capital gain, generally 15–20% depending on your income.

    So yes, the taxes would be based on your profit from the sale, not on your mortgage balances. A 1031 exchange could defer that gain if you reinvest in another property, but if you sell outright, you’ll owe capital gains and depreciation recapture taxes for 2025.

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  • Mary Jay
    OP
    Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes
    1y

    Thank u guys!

    I am so glad I came to talk to you all before making any big moves.

    I really appreciate all your wisdom and knowledge! 
    thank u so much from the bottom of my heart! :) 

    0Reply
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