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What are the tax implications of selling a rental?

May 10, 2000


From:  Stephen W. Houdek
Date:  Tue, 4 Jan 2000

My father is retired, 65 years old, and has rental income from a second house he inherited 10 years ago. If he were to sell this home, what would the tax implications be? Is it taxed as a capital gain? If so, at what rate?

He is in the low tax bracket.

Thank-you.

Answer

Date:  January 2000

Hello Stephen,

Your father received a new tax basis in the house as of the date of death of the previous owner of the house.

Accumulated depreciation for the house is a special category of gain taxed at a maximum rate of 25%.

Any gain in excess of the accumulated depreciation is a class of income called Section 1231 gain. When there is a net Section 1231 gain for the year of sale and there weren't Section 1231 losses in previous years, the gain is taxed as a long-term capital gain, subject to a maximum tax rate of 20%.

Your father could eliminate the capital gain part by living in the home for two years and converting it to a principal residence.

In either case, get professional help. I've omitted some details in this answer.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

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What are the tax implications of selling a rental home?

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