How to Figure Capital Gain on a Rental House


Michael Lodge  by Michael Lodge

Selling rental income property is a complicated issue.  It is not the same as selling your home, income property has a calculation process that needs to be understood.  Here is a good article on what the steps are in determining capital gains on rental income producing property.

by Naomi Smith, Demand Media

Determining the gain or loss on rental property is more complicated than for your residence. Certain expenditures made over the years increase basis, while deductions and credit reduce basis. The key to an accurate calculation is to keep careful receipts and tax records for your property until it’s sold. Capital gains on rentals are fully taxable; there is no exclusion such as that for capital gains on residential real estate unless you used the home as your main residence for a certain period of time.

Step 1 – Start with basis of the property. This is the original purchase price. Calculate the adjusted basis by adding the cost of improvements you paid for; this includes any expenditures that increase the value of the property — for instance, the cost of a new roof, an addition, new landscaping, insulation or appliances. You should have receipts for all such payments; if you don’t, consult your tax returns for prior years to determine the amounts.

Step 2 – Add in any closing costs and legal fees you paid, including title transfer, documentation, and any property tax the original seller did not cover. Do not include costs of financing or appraisals.

Step 3 – Subtract out depreciation claimed in prior years for the property and improvements. There should be a record for depreciation on your tax returns, including a figure for accumulated depreciation. The Internal Revenue Service allows landlords to write off depreciation against rental income, but the bill comes due when you sell the property.

Step 4 – Subtract any tax credits, energy conservation subsidies or exclusions received for the property. Also subtract any casualty or loss deductions or reimbursements received from insurance.

Step 5 – Subtract the resulting adjusted basis from the selling price of the property. If you sell the property for $500,000 and had an adjusted basis of $350,000, you have $150,000 in capital gains.

Step 6 – Report the sale of the rental property on Schedule D of Form 1040 in the year you sell the property. Also file Form 4797 (Sales of Business Property) if you claimed deprecation at any time on the property.