Selling a rental property can be a profitable endeavor, but understanding the taxes involved is crucial for maximizing your earnings. Start by determining your cost basis, which includes the original purchase price plus capital improvements like renovations or major repairs, minus any depreciation claimed over the years. Next, subtract this cost basis from the sale price (after deducting closing costs and realtor commissions) to determine your taxable gain. Your tax liability depends on whether the property is classified as a short-term or long-term asset—properties held for less than a year are subject to higher short-term capital gains taxes, while those owned for over a year benefit from lower long-term rates. Additionally, depreciation recapture requires you to pay a 25% tax on the amount deducted over time. Finally, apply the appropriate federal and state tax rates, which vary based on location and income bracket. Federal long-term capital gains tax maxes out at 20%, but some states, like California, impose additional taxes, potentially pushing the total rate over 33%. Consulting a tax professional ensures accurate calculations and strategies to minimize your tax burden when selling your rental property.
source: https://capitalgainstaxsolutions.com/navigating-capital-gains-taxes-when-selling-a-rental-property/
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