Thinking about taxes is a great way to get your heart rate up and heighten your stress levels. As a guaranteed fact of life, taxes are inevitable. Understanding them better will help relieve some of the stress surrounding filing the paperwork. There are several types of taxes, one of which is the capital gains tax you pay when you sell big assets. When you are a landlord, understanding capital gains tax on a rental property isn’t just a stress reliever but a necessity.
Understanding capital gains taxes and how they apply to you is essential when trying to sell a rental Ogden property. There are federal and Utah state taxes to factor in when figuring out what you need to pay. While preparing to sell a property for profit, ensure you are familiar with the rules to avoid nasty financial surprises.
Things to Know Before Googling “Sell Rental Properties Near Me”
Before you sell the rental Ogden property, it is important to understand all the financial implications. First, a capital gains tax is a tax on the profit you make from selling a large asset. The asset is considered a capital asset, and the profit you made was a gain, making it a capital gain. The IRS defines a capital gain as:
“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss.”
The basis of the asset is the price you paid for it unless there is a depreciation expense factored in and claimed.
Capital gains on rental properties are divided into short-term and long-term. If you own a Ogden property for less than a year, the capital gains are considered short-term. Therefore, short-term gains are taxed at a regular income tax rate. Long-term capital gains apply after you have owned the property for a year and a day or more.
When you decide to sell the rental property for a profit, long-term gains are divided into three different Federal tax brackets. The percentage you pay on your gains depends on your filing status and income for the previous year. Your annual income and married status decide if you pay 0%, 15%, or 20% in capital gains tax on rental property.
- For married individuals with earnings of less than $78,750, the capital gains tax rate is 0%.
- For married individuals with earnings between $78,751 and $434,549, the capital gains tax rate is 15%.
- The net capital gain rate for people whose taxable income exceeds the threshold is 20%.
In Utah, no matter how much you make, the tax rate is 4.95% of your gain.
Calculating Capital Gains on Rental Properties
A quick walk-through will help you better understand what your capital gains are and what will be taxed. For example, a rental property bought at $340,000 four years ago is sold for $400,000 this year. The first step is to add expenditures made to improve the property to the purchase price. These must be physical improvements that add real value to the home. Other items that can be added to the purchase price are assessments for local improvements, impact fees, legal fees, and zoning costs.
$340,000 purchase price + $25,000 improvement costs = $365,000
Subtract depreciation on the property and other items such as canceled debt, insurance payouts, and rebates.
$365,000 – $40,000 depreciation – $25,000 insurance payouts = $300,000
Subtract this adjusted number from the amount you sold the property for.
$400,000 – $300,000 = $100,000 Taxable capital gains.
After that, it becomes a little more complicated with taxable depreciation and ensuring you are paying both your federal and state gains tax.
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