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Rental Sale

Rental Sale Partial Exclusion

Owning a rental property could be a rewarding venture, providing a steady stream of income and potential for long term appreciation. However, it also entails managing various tax obligations and staying compliant with the tax laws. Dimov Tax & CPA Sevices is dedicated to empowering the property owners with the knowledge and strategies needed to minimize tax liabilities and maximize profits.

Every owner of the property wishes to have a rental property with a steady income. A steady rental income assists in covering mortgages and provides extra profit. But ownership of rental properties also comes with its share of challenges like high vacancy rates and poor management.

Fortunately, a rental property could appreciate and attract fewer tax fees. If the rental property increases in value over the years and a loss is made, the best decision would be to sell it. After appreciation, selling the property could be beneficial as it would increase the cash flow.

However, the selling option could also attract other issues like reducing the total amount earned from the sale and the capital gains tax concerns. Therefore, the capital gains tax requires strategic attention.

Capital Gains Tax Matters

A capital gain tax is the levy on the profit after selling the rental property. The taxable amount is calculated as the difference between the asset buying price (including expenses and other closing costs) and the selling price. The tax for the particular year the property was sold ranges between 0-20% depending on the tax bracket, which changes yearly.

A long term capital gains tax could be paid if the property is more than one year old. Correlatively, it will be a short term capital gains tax, if it is a less than a year old property. A long term capital gains tax is advantageous for the owner of the property as it is lower than that of a short term capital gains tax.

What Triggers Capital Gains Tax?

The only thing that can trigger to pay capital gains tax is to avoid the Internal Revenue Service. Failure to do so attracts fines and penalties for negligence. It can also attract criminal prosecution if the IRS determines the act was intentional or fraudulent. Therefore, it is best to fill out Form 8949 (Sales and Other Dispositions of Capital Assets), a rental property was sold. Then Form 1099-S would be received.

How Much Is Capital Gains Tax?

The amount payable as capital gains tax depends on two main factors. The first factor is how long the asset was held. For example, the capital gains tax may be lower than if it is been for a short term if the rental property was kept for several years. Additionally, the amount of income tax that was earned also determines this amount.

Understanding Rental Sale Partial Exclusion

Rental sale partial exclusion is a provision in the U.S. tax code that allows taxpayers to exclude a portion of the gain from the sale of a property that has been used as a rental or investment property. 

The partial exclusion of gain from the sale of a property that has been used as a rental or investment property can be found in Section 121 of the Internal Revenue Code. Specifically, it is outlined in IRC Section 121(d)(6). The details about the exclusion of gain from the sale of a principal residence, including the eligibility criteria and limitations for taxpayers who have used the property as both a primary residence and a rental or investment property were provided in the mentioned section. 

This exclusion could result in substantial tax savings for property owners. Therefore it is an essential consideration for those looking to sell their rental properties.

To qualify for rental sale partial exclusion, certain criteria must be met:

  1. Ownership and Use: The property should have been owned and used by the taxpayer as their primary residence for at least two out of the five years preceding the sale. Additionally, the property must have been rented out for at least two years during the five year period.

  2. Exclusion Amount: The maximum exclusion amount for rental sale partial exclusion is $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. This means that eligible taxpayers can exclude up to $250,000 or $500,000 of the gain from the sale of their rental property from their taxable income.

  3. Capital Gains Tax: Any gain that exceeds the exclusion amount will be subject to capital gains tax at the applicable rate. However, utilizing the partial exclusion can still result in significant tax savings by reducing the overall taxable gain.

Benefits of Rental Sale Partial Exclusion

There are several benefits to leveraging rental sale partial exclusion:

  1. Tax Savings: By excluding a portion of the gain from the sale of a rental property, taxpayers can significantly reduce their tax liability. This allows taxpayers to keep more of the profits generated.

  2. Flexibility: Rental sale partial exclusion provides flexibility for owners of the property who may have used their rental property as their primary residence for part of the ownership period. This flexibility can be especially advantageous for those who have moved frequently or have multiple rental properties.

  3. Incentive for Investment: Knowing that they can potentially exclude a portion of the gain from the sale of a rental property can serve as an incentive for individuals to invest in real estate, thereby stimulating economic growth in the housing market.

Utilizing Rental Sale Partial Exclusion

The following strategies should be carefully considered in order to make most of the rental sale partial exclusion:

  1. Timing of Sale: Timing the sale of the rental property to coincide with meeting the ownership and use requirements can maximize the available exclusion amount.

  2. Consultation with Tax Professionals: Seeking guidance from experienced tax professionals would help taxpayers navigate the intricacies of rental sale partial exclusion and ensure compliance with all relevant tax laws. Dimov Tax is ready to assist you with all aspects of the process.

  3. Documentation: Maintaining thorough documentation of ownership, use  and rental history of the property is essential for substantiating eligibility for rental sale partial exclusion in the event of an IRS audit.

In conclusion, rental sale partial exclusion is a valuable tax saving strategy for individuals selling rental properties in the United States. By understanding the eligibility requirements, benefits and utilization strategies outlined in this guide, taxpayers can optimize their returns and minimize their tax liability. For personalized guidance tailored to your specific financial situation, trust the expertise of Dimov Tax & CPA Services to help you navigate the complexities of rental sale partial exclusion and other tax related matters. Contact us today to schedule a consultation and take the first step toward maximizing your tax benefits.

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