When a rental property is sold, the difference between the basis in the rental property and the amount it is sold for is a capital gain on rental property or a capital loss on rental property. If real estate owner or landlord received the rental property as a gift or inheritance, the basis needs special consideration.
A real estate owner or landlord can have a capital gain on rental property if they sell the rental property for more than the basis. They have a capital loss rental property if real estate owner or landlord sells the rental property for less than the basis.
Capital gains and losses are classified as long-term or short-term. If real estate owner or landlord holds the rental property for more than one year before they dispose, the capital gain on rental property or capital gain on rental property loss is long-term. If real estate owner or landlord holds it one year or less, the capital gain or loss is short-term.
Capital gains on rental property and deductible capital losses on rental property are reported on IRS Form 1040 Schedule D. If real estate owner or landlord has a net capital gain, that gain may be taxed at a lower tax rate than the ordinary income tax rates. The term “net capital gain” means the amount by which the net long-term capital gain for the year is more than the sum of the net short-term capital loss and any long-term capital loss carried over from the previous year. Currently net capital gain is generally taxed at rates no higher than 15%, although, for 2008 through 2010, some or all net capital gain may be taxed at 0%, if it would otherwise be taxed at lower rates. There is one exception for capital gain on rental property:
- The part of any net capital gain from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum 25% rate.
If real estate owner or landlord has a taxable capital gain, estimated tax payments may be required.
If the capital losses on rental property exceed the capital gains on rental property, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if married filing separately) or the total net loss as shown on line 16 of the IRS Form 1040 Schedule D, Capital Gains and Loses. If the net capital loss on rental property is more than this limit, a real estate investor or landlord can carry the loss forward to later years.
For more tips on how to minimize capital gains on rental property or defer capital gains on rental property check rental property tax deductions.