Selling a rental property with appreciation can be exciting until it’s time to address capital gains taxes. If you’ve claimed depreciation over the years (as most rental owners do), here’s what you need to know:
Example:
Let’s imagine you bought a condo for $500,000 and spent another $50,000 making improvements to it, giving you a total cost basis of $550,000. Now let’s assume you have rented it out for 10 years and claimed $20,000 in annual depreciation (based on the IRS’s 27.5-year depreciation schedule), totaling $200,000 in depreciation. In 2024, you choose to sell this property for $800,000.
Step 1: Adjusted Cost Basis
Your total depreciation ($20,000 x 10 years = $200,000) is subtracted from your original cost basis ($550,000), leaving you with an adjusted cost basis of $350,000.
Step 2: Calculate How Much You Made
Selling the property for $800,000 means you made a profit of $450,000 ($800,000 – $350,000).
Step 3: Tax Time
If you were in the highest federal tax bracket in 2024, here’s what the estimated tax liability would look like:
- Depreciation Recapture: The first $200,000 is taxed at 25% → $50,000
- Long-Term Capital Gains: The remaining $250,000 is taxed at 20% → $50,000
- Net Investment Income Tax (3.8% on the full $450,000 gain) → $17,100
Final Tax Bill: $117,100
Keep in mind that this is an example and does not take into consideration any specific taxable situations or state income tax withholdings, which can vary scenario by scenario. As a result, we recommend that you consult with your tax advisor before making any decisions.
If you have questions, please contact our office to discuss your mortgage needs with one of our experienced Mortgage Loan Originators at (760) 930-0569.
