How do you calculate capital loss on sale of rental property?
Calculating your capital loss is relatively easy. Subtract your cost base that you paid for the property plus the cost of capital improvements you made while you owned it from your sale price after you’ve completed the costs and commissions. When a taxpayer earns a financial gain from an asset, the IRS enforces a process called a recovery of depreciation, which essentially taxes the taxpayer’s profits from the sale of that asset. The most common asset that this procedure applies to in the world of real estate investment is rental properties, but it can also apply to other assets such as furniture and appliances.
If a taxpayer sells an investment property, a capital gains tax applies to the recovery of depreciation. Capital gains tax does not apply in some other cases where a taxpayer benefits financially from the sale of an asset such as equipment. If you don’t have a lot of tax law, a few definitions will help you determine the impact of your rental property sale. If you have had a rental property for more than a year and you sell it at a profit, your profit will be taxed at two different tax rates.
While selling a rental property at a loss is not an easy decision, real estate investors sometimes have no choice. Just over a year ago, Ted and Alice bought a fixer tenement house that needed a new roof and HVAC system. These capital gains distributions are usually paid out to you or credited to your investment fund account and are considered income for you. While it would be nice to pay tax at the lower capital gains rate for the entire profit, you pay up to 25% (based on your normal tax rate) for the part that is tied to depreciation deductions.
The tax base of the rental property is the lower of the cost or value when it is put into operation, plus any improvements less any depreciation. Ted and Alice list the rental properties for sale on Roofstock Marketplace — the number one marketplace for buying and selling investment properties — and quickly receive an offer from another investor. You may see a loss if you need to sell a rental property in a declining market or simply need to invest more money in a property than it’s worth. However, if you convert a personal residence into a rental property and then sell it for less than the initial cost, will you have a deductible loss? Maybe.
The example above is simplified and calculating an actual loss of rental property can be much more complicated. But what if you sell your rental property? Sometimes when you decide to divest, you may lose the price. If you want to sell an investment property — but don’t need a payout yet — you can defer paying capital gains taxes by making a similar exchange. Stessa, a free online and mobile real estate management solution provider, helps simplify the financing of rental properties by automatically tracking income and expenses, entering the right accounts, and updating the balance sheet to report the real estate cost base in real time.
The IRS says you can start writing off rental properties as soon as it goes into operation — i.e. when it’s ready and can be used as a rental. You can also repay the loss to offset taxable income for the last two years, although you will need to resubmit those tax returns.