Thinking about selling your rental property? Be prepared for potential tax consequences! Here’s a concise breakdown:
Capital Gains Tax:
You may owe taxes on the profit (gain) you make from selling your property. This applies whether you held the property short-term (less than 1 year) or long-term (1 year or more). “Material participation” and “passive activity” rules exist, but typically don’t impact standard residential rentals. So let’s assume it is a normal sale, and not a casualty loss, theft or unusual event. Here are the two key points to remember:
- Taxable gain includes both the sale price and any depreciation you deducted over the years.
- Holding period determines whether you qualify for potentially lower long-term capital gains tax rates.
With that in mind, let’s dig into the forms.
IRS Forms for Business Property, Capital Gains and Assets
There are several forms that need to be involved in this transaction and they include:
- IRS form 1040 Schedule D capital Gains and Loss
- IRS form 4797 Sales of Business Property
- IRS form 8949 Sales and Other Dispositions of Capital Assets
All that said, the informational returns such as Form 1099 B, or 1099 S, usually for reporting a capital gain by the real estate reporting person.
Some of these forms may not be necessary depending upon the type of sale and the position the seller had in the property sold. With that said, we’ll keep it simple and focus on sales that are most common.
Let’s look at the first subject in which you are selling rental property that you have a personal use stake involved. You need to report the gain on a sale or exchange of this type of property on Form 8949 and 1040 Schedule D. Please note that losses on this type of sale are not deductible. Also if you had a loss and you received a 1099 S, report this on the 8949 and Schedule D even though it is not deductible.
Now let’s look at the “holding period” in which you will determine whether you have a Long term or Short term capital gain. The period of time less than 1 year is considered “short term” and any time after that is “long term”. Please note also that with Installment Sales the same applies if the payments are made within the current tax year then it is short term.
Reporting Gains and Losses for Depreciable Residential Rental Property on Form 8949:
| Holding Period | Outcome | Form 8949 Section | Notes |
|---|---|---|---|
| Less than 1 year | Gain | Part I | Short-term capital gain |
| Less than 1 year | Loss | Part I | Short-term capital loss |
| More than 1 year | Gain | Part II | Long-term capital gain |
| More than 1 year | Loss | Part II (if not subject to recapture) | Long-term capital loss |
| More than 1 year | Gain (subject to recapture) | Part III (1250) | Long-term capital gain with potential recapture of depreciation |
Lastly, there may be a “recapture” of depreciation, investment credits, rebates, and certain bonuses obtained in the purchase of the property. The nature of the sale will determine these factors.
For more detailed information, please review IRS Publication 527, 537, 544 and 550.