Understanding the Taxes FOR Selling a Rental House in Phoenix
At the point when you offer your main living place, taxes for selling a rental house in Phoenix may not apply but that changes when selling an investment property. The first $250,000 you make from selling your property is absolved from capital gains, and that figure is doubled assuming you’re married. In any case, taxes for selling a rental house can introduce a completely different set of rules. If you’re unsure which taxes apply and how they work, the following insights may be valuable. You may then be better equipped to navigate taxes for selling a rental house in Phoenix with confidence.
Taxes for Selling a Rental House in Phoenix – Depreciation and Recapture Tax
Depreciation and recapture tax is one of the lesser-known taxes for selling a rental house in Phoenix, yet it can catch many property owners off guard. That’s why individuals who inherit homes often try to sell them as quickly as possible. The longer they hold onto the property, the more taxes they may owe on what becomes a secondary home with income potential.
When calculating this tax type, it’s essential to understand what depreciation is and how the IRS calculates it. They allow you to depreciate the property of your value, excluding the land, for 27.5 years to determine the annual depreciation expense.
For example, if you purchased a rental home for $150,000 with a land value of $25,000, you would use the following calculation to determine your annual depreciation expense.
$150,000 – $25,000 = $125,000
$125,000 / 27.5 years = $4,545
If you earned a net income of $5,000 from your rental property, you could offset it against the depreciation expense to reduce your taxable income to just $455.
While setting aside cash may be your objective, the IRS could need that cash back when you’re selling a rental house in Phoenix. This is called depreciation recapture tax. This tax is treated as normal pay, and that implies you would owe the yearly depreciation cost of $4,545 multiplied by your tax rate for every year.
Read: Do You Pay Taxes When You Sell a House in Phoenix?
Capital Gains Tax
It very well may be challenging to really make sense of depreciation and recapture tax, however at that point you need to consider capital gains tax.
Capital gains tax is a tax on the profit you produced from selling a house in Phoenix and can be isolated into transient capital gains and long-term capital gains.
Short-term capital gains apply to a property you could trade in the span of a year or less. This is a standard choice for real estate investors who fix and flip properties. In this present circumstance, your short-term capital gains would be treated as income, and you would pay a federal income tax rate.
Conversely, you would pay the long-term capital gains tax rates in the event that you clutch your rental property for more than a year. Generally, these are somewhere in the range of 0% and 20% in light of your taxable income.
How to Avoid Property Taxes on Selling a Rental House?
Few individuals enjoy paying taxes, so in the event that there’s a method for lessening the amount you pay or staying away from them through and through, you might like to explore it. Tax harvesting and 1031 Exchange are two lawful choices for diminishing or keeping away from tax bills.
1. Tax Harvesting
Tax harvesting allows you to balance your sale gains against the misfortunes of another. For instance, on the off chance that one of your stocks made you a loss, you could possibly counterbalance the profits from your property sale. This strategy involves selling underperforming investments to realize losses that can offset the gains from the sale of your property. By doing so, you can reduce your taxable income and potentially lower your overall tax bill. It’s important to consult with a tax professional to ensure you’re following the rules and maximizing your benefits.
2. 1031 Exchange
On the other hand, you could wish to find out about the Internal Revenue Code Section 1031, which permits you to put your rental sale proceeds into more property to concede charges. A 1031 Exchange allows you to defer paying capital gains taxes on an investment property when it is sold, as long as another similar property is purchased with the profit gained by the sale. This can be a powerful tool for real estate investors looking to grow their portfolios without the immediate tax burden. However, there are strict timelines and rules to follow, so working with a knowledgeable intermediary is crucial.
Additional Strategies
In addition to tax harvesting and 1031 Exchanges, there are other strategies to consider:
- Primary Residence Exclusion: If the property you’re selling is your primary residence, you may qualify for an exclusion of up to $250,000 ($500,000 for married couples) of the gain from your income. To qualify, you must have owned and lived in the home for at least two of the five years before the sale.
- Installment Sales: This method allows you to spread the gain from the sale of your property over several years, potentially lowering your tax liability each year. By receiving payments over time, you can manage your income and tax bracket more effectively.
- Charitable Remainder Trusts: Donating your property to a charitable remainder trust can provide you with a tax deduction and a stream of income for life or a specified term of years. After the term, the remaining assets go to the designated charity.
Importance of Professional Advice
Whether you sell to a professional home buyer, through a real estate professional, or by yourself, you might be expected to pay taxes. Notwithstanding, the more you are familiar with them, the more control you could have over the amount you pay. Consulting with a tax advisor or real estate attorney can provide you with personalized advice tailored to your specific situation. They can help you navigate the complexities of tax laws and identify the best strategies to minimize your tax burden.
Conclusion
In conclusion, while paying taxes is inevitable, there are several strategies you can employ to reduce or defer your tax liability when selling a rental house in Phoenix. Tax harvesting and 1031 Exchanges are two effective methods, but other options like primary residence exclusions, installment sales, and charitable remainder trusts can also be beneficial. By understanding these strategies and seeking professional advice, you can make informed decisions that align with your financial goals.