- When you sell your primary residence, you may be able to take advantage of special tax treatment that allows you to avoid paying capital gains taxes on the sale. However, with a rental property, this deduction is not allowed. When you sell a rental property for more than you originally paid for it, you will have to pay capital gains taxes on the sale. If you held the property for more than a year, you will pay taxes at the long-term capital gains tax rate.
- If the value of the rental property declined over the period that you owned it, you could take advantage of a capital loss. When you sell the house for less than what you paid for it, you can claim a capital loss or a Section 1231 loss, allowing you to offset other types of income. For example, it can reduce your personal income so that you have to pay less taxes for the year.
- When you sell a rental property, you may also lose several tax deductions that you have become accustomed to taking. When you are a landlord, you can take a deduction for advertising costs, maintenance costs, major repairs and depreciation of the property. You can also take a deduction for having a home office if you use an area inside your house as an office for the business. Losing these deductions could significantly increase your tax bill.
- Selling a rental property could also impact your property taxes. When you own rental property, you typically have to pay property taxes on that property to the local county government. If you get rid of that property, you will no longer be responsible for paying these taxes. This will save you money every year from the point that you sell the rental property. While it may not be a significant amount, it may lower your overall tax liability for the year.
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