Tax liability when selling investment property

[Mark A. McElhannon]

I have basic question that I'm still unclear on. I'm looking to sell my first SFH, which I've owned and rented for 17 years, for a profit. I'm unsure of the tax liability/taxable gain due after the sell. This will determine if I will a 1031 exchange or not.

Is the taxable amount a) the profit or difference between the purchase and sell price, b) the cumulative net gain over the time owned or c) something else

looking to roll into larger SFH or Multi. Thanks!

[Austin Cheatham]

So the taxable amount would be:

Sales price

Add: any improvements capitalized

Less: original purchase price

Less: any depreciation taken

So let's say you had a house you bought 17 years ago for 100k. You remodeled it at some point and added a new roof and HVAC system and that was all in for 50k. So now we're all in total basis of 150k. Over those 17 years we took depreciation on all of this things, and across those 17 years lets say we took 75k in depreciation. Now our basis in our house is 150k purchase and improvements less 75k depreciation. So basis is now 75k. That house sold for 200k. Your taxable gain would be the 200k-75k=125k. You would have depreciation recapture on the items you depreciated (75k), taxed at ordinary income rates and then any of the actual property appreciation would be taxed at favorable capital gains rates (50k). 

1031 exchange will allow you to defer all of that gain as long as you meet conditions.