Capital Gains Rental

Capital gains on rental property is a tax question that comes up for nearly every landlord in Fort Worth, Texas who is weighing a sale. When a rental property sells for more than its adjusted basis, the profit is generally taxed as a capital gain. If the property was held for more than one year, the gain is typically taxed at long term capital gain rates at the federal level, though the portion of the gain attributable to depreciation taken over the holding period is subject to unrecaptured Section 1250 gain treatment, which carries a maximum federal rate of twenty five percent rather than the lower long term capital gain rates. Texas does not impose a state income tax, so investors in Fort Worth, Tarrant County, and across the Dallas Fort Worth metroplex avoid a layer of state level tax that landlords in many other states must plan around, though the federal liability remains.

The adjusted basis used to calculate the gain starts with the original purchase price plus qualifying capital improvements, then subtracts total depreciation claimed during the ownership period. Investors who have owned a rental property in Fort Worth for many years often discover that years of depreciation deductions have reduced their basis substantially, which can produce a larger taxable gain than the simple difference between sale price and purchase price would suggest. Selling costs, including commissions and closing charges, generally reduce the amount realized and can be netted against the gain calculation. High income investors may also owe the three and eight tenths percent net investment income tax on rental gain in addition to standard capital gain and depreciation recapture rates.

A Section 1031 exchange is the primary tool available to defer both the capital gain and the depreciation recapture tax on a rental property sale, provided the relinquished property and the replacement property are both held for investment or business use and the exchange follows the forty five day identification period and one hundred eighty day exchange period administered through a Qualified Intermediary. Investors in Fort Worth considering a sale should model the tax liability under a straight sale against the deferral available through an exchange before deciding how to proceed, since the difference in after tax proceeds available for reinvestment can be significant.