Many people choose to use rental properties as a way to make some money. There are many families who like the idea of living in a home, or even an apartment, because everything is taken care of for them and perhaps they just aren’t able to get the funds for a home of their own. You can make some good money off your rental property as long as you pick a good location, take care of the property, and pick people who are going to stay for a long time.
When it comes to tax season, it is important that you claim your rental property income properly. It is not a good idea to try and hide this income; the IRS does expect you to claim it when you work on your tax return each year that you use the property as a rental property. The way that you claim this income, or any profit that you make when you sell this property, is going to vary depending on when you got the property, how long it has been a rental property, and whether or not you ever lived in the property. Often it is best to bring in a tax professional to ensure that you are taking good care of getting the right tax forms filled out when it comes to selling your rental property. Let’s take a look at some of the different things you need to consider in order to file properly and not raise your taxes too much.
Tax Treatment
In most cases, if you sell any kind of real estate, the IRS is going to classify this under capital gains. The tax is going to just be applied to the amount of difference that is present between what you purchased the property for and what you are able to sell the property for. So if you are able to make a profit of $10,000, you would just be taxed on that amount, and not for the $100,000 that you may have sold the property for total.
In addition, the rate is going to depend on the length of time that you had the property. In order to get any breaks for your taxes, you will need to hold onto the rental property for more than a year. When you go for more than a year with the rental property before selling, you will be taxed 15 percent on the profit that you make. If you are uncertain about the time frame that you sold the house or want to see how much you are going to be taxed on it, make sure to find a good tax professional that will be able to help you out the whole way.
Tax Losses
If you used this property as your primary residence, there are some exemptions that can be made on how much you are going to be taxed on the profit. Since we are talking about rental properties, this is usually not going to count as the rental property will be a secondary living place and they won’t let you take this exception. If you happen to live most of the time in the property as well as using it for a rental property, you may be able to wave the tax treatment in some circumstances.
Another thing to keep in mind is if you sell the property for less than you purchased it. You will be able to take this loss against your other income and get a tax deduction. For example, if you sold the building for $90,000 and purchased it for $100,000, you can take that loss and use it to lower the rest of yoru taxes.
Special Circumstances
There are a few special circumstances that can come into play and will help you to determine if you will be able to get a break on any taxes that you are paying on your rental properties. For example, if you sell one or more of your rental properties and then put that profit into another property, you can avoid some of these taxes. You are only going to have a small window of time to do this. In most cases, you need to choose a new property within 45 days and then close on the deal within six months in order to get this break. Since the time limits are low and this process can get confusing, it is a good idea to hire a tax professional to help you out and ensure it all gets down on time.
Selling your rental property can be a great way to make some extra money or something that you may be considering if you want to get out of the real estate game. But when you choose to drop out of your rental property, you have to make sure that you are handling it properly and taking care of your tax return so you don’t get a big bill when it’s all said and done. Hiring a tax professional to help you every step of the way can make things so much easier. They can take a look at the situation and determine if there is anything that you can do to change your tax bill.
When you are considering selling a rental property or any other property you own, make sure to hire out professionals to help out. Check out our profile and contact us today.
Larry Gurewitz