If you’re an investor looking to sell the rental property you own, You are probably looking for the full range of tax-free income you qualify for, such as the tax-deductible closing costs.
The tax implications of selling a rental property could be more costly than selling a primary residence since the IRS considers it an investment in a business.
When selling a rental property, closing expenses can be used to reduce tax-deductible earnings earned through the investment, thereby decreasing the tax burden overall.
This includes, but is not restricted to:
- Appraisal fees
- Charges for loan origination
- Title fees
- Transfer costs
- Interest on mortgages
- Points on the mortgage
- Taxes on real estate property
- Legal costs
The items that are not tax-deductible include the costs related to refinancing the loan, fire insurance premiums, and rent. It is essential to consult with a tax professional to ensure that you are getting all tax deductions that you can claim in connection with the sale of the rental property you own.
Capital Gains Tax
If you sell an investment property to make the purpose of earning money, you may be affected by capital gains tax. It is a tax that is paid on the earnings you made on the investment property depending on the price you paid for the property and the worth of the property at the time you decide to sell it. The amount you paid for your home is also known as”tax base.
The closing costs of renting the property are tax-deductible, as mentioned earlier, and may be used to reduce the basis (or cost that you are paying for your house), which could result in a reduction of taxes on capital gains.
There are methods to delay capital gains tax owed in the event of selling a rental home through a process known as the 1031 exchange. A 1031 exchange is the process of using the proceeds you earn from selling your investment property to purchase similar property within a specific period. With a 1031 exchange, capital gains tax is deferred, which is appealing to investors of all kinds.
When selling a rental property, it is recommended to talk to an accountant to ensure you’re getting the maximum tax deductions you’re qualified for.