PHILADELPHIA - Adjusting your basis in a rental property can lower the tax you owe when you sell it. For example, if you bought your rental property for $120,000, plus $3,000 for legal fees and $10,000 for capital improvements and financed it for ten years, and you built a fence on your neighbor's property, your basis will be reduced to $134,400. You'll pay $13,000 in taxes, not including additional taxes collected by the state.
Capital gain
Whether you're selling your primary residence or a rental property, there are strict rules regarding capital gains taxes. Capital gain is the amount you make from selling a property after deducting the original purchase price and any major improvements. You must calculate this amount and pay it to the federal and state governments.
The standard capital gain tax is 15%, but you may have to pay more if you're over a certain income level. That's because you'll have to pay Medicare tax on top of the tax on the capital gain. You can calculate how much you'll owe based on the sale price and the expenses you've made, such as major renovations.
The amount of capital gain you have to pay depends on how long you have owned the property. If you've held the rental property for more than one year, you may have to pay a higher tax rate. However, the tax rate is lower for long-term capital gains than for short-term ones.
Adjusting basis
The first step in determining your adjusted basis when selling your rental property is its original cost. This is the cost you paid for the property when you bought it or built it. The adjusted basis will be equal to this amount less any casualty loss amounts and any other decreases in value. You also have to include mortgage proceeds.
In some cases, you can claim an exclusion for the loss on the sale of a rental property. For instance, if you buy an apartment building for $3 million and rent it out for two years, you can claim a loss of $14,909 or more.
In addition to the sale price, you also have to consider any selling costs, which will reduce your adjusted basis. These costs include commissions and advertising expenses. In addition to the costs associated with selling your rental property, depreciation on the property is included in the adjusted basis. If your property depreciates by $10,000 a year, your adjusted basis will be $353,000. Any additions or improvements to the property would also be included in the adjusted basis.
Tax-loss harvesting
Tax-loss harvesting is a way to use capital losses to offset taxable investment gains. It is possible to harvest losses from a number of types of accounts, including IRAs, 401(k)s, and 529s. These accounts provide a tax force field that allows investors to deduct losses from their investments.
The IRS has rules to prevent taxpayers from gaming the system. These include the "wash-sale" rule, which prevents investors from claiming a taxable loss on an investment that has been held for more than 30 days. These rules also apply to spouses.
Tax-loss harvesting is a good way to reduce your tax bill. It means selling investments at a loss and using the money to offset other investments. You can use up to $3,000 of capital losses each year as a tax deduction and carry the rest to future years. This can turn a lost investment into a winner.
In order to qualify, you must sell your rental property before 2023. The capital gain you realized on the sale equals the difference between the cost basis and the sale price. In 2023, the capital gain is $305,000, which means you've made a $150,000 profit. You can use that money as an investment real estate loss tax deduction.
BIDEN's tax reform
The Biden administration recently released its fiscal year 2023 budget blueprint, including several familiar tax reform proposals and brand-new initiatives. It also calls for the highest individual tax rate to increase to 39.6% and for well-off households to pay higher tax rates. These proposals could potentially increase the tax you pay when selling a rental property.
If you want to minimize the tax, you pay when selling your rental property, you should consider structuring the sale so that you can use installment plans to pay off your tax bill. The budget proposal offers options to help wealthy taxpayers spread the top-up payments over nine years. It also offers flexibility to those who lack the liquidity to pay in full. In addition, the Biden administration proposes a $50 billion measure for state housing agencies that allows states to increase the supply of affordable housing through tax-credit projects financed by passive activity bonds.
Biden's budget also proposes eliminating the like-kind exchange loophole, which allows wealthy real estate investors to sell rental properties without paying tax on the realized capital gain in the year of sale. Biden's budget also includes several other tax reforms that could significantly affect your personal tax bill. One of the new proposals in the budget proposes a broadening of recaptured depreciation deductions for many property types, including residential rental property, commercial real estate, warehouses, and structural components.
