Rental Property being sold at a gain in utah

[Kristi Hill]

I bought a property for a friend in 2005. She rented if at cost of the mortgage payment due and I made no money off of her. She moved out in March and we have had to do extensive work to get it ready to sell. It will likely be at about a $60,000 gain when finally sold. How does taxation  work on a rental property?

[Jon Holdman]

I highly recommend consulting with your accountant about rental property sales.  

I assume you have been reporting the rental on taxes since you bought it.  Part of that involves tracking depreciation on the property.  Depreciation decreases your basis.  Your basis starts at the price you paid plus closing costs.  You add any capital improvements you've made.  You subtract the amount of depreciation taken or allowed, whichever is larger.  This will be your basis when you sell.  Some of what you've spent getting it ready to sell adds to the basis, some is immediately deductible.  Again, consult with your accountant. 

When you sell, your gain on the sale is the selling price, less selling costs, less your basis.  If you have carry forward disallowed passive losses those would be subtracted, too.  Your gain is split into two parts.  First, the amount of gain up to the depreciation taken or allowed (whichever is greater) is subject to the tax on unrecaptured depreciation.  That's at your ordinary tax rate, but capped at 25%.  Any remaining gain would be subject to capital gains taxes.  I think that's 15%, but this may have changed in the new tax law.

If you've not been claiming the rental income on taxes and  carefully tracking the assets associated with this property you will need to do some work to sort this out.  You've owned this property for 13 years.  That means the allowed depreciation is 13/27.5 of the value of the improvements.  That's almost half.  So, if you paid $100K and the land was worth $20K, you would have been allowed 13/27.5 * $80K = about $38K.  Considering nothing else, your basis would be $62K.  If you were to net $150K on the sale after selling costs, you would have $88K of gain.  Of that, $38K would be subject to the tax on unrecaptured depreciation and $50K would be subject to capital gains taxes.  In reality this is much more complex because of purchase closing costs, improvements over time, and the fix up work you've done to sell it.