Outright Sale

When a rental property is sold outright, the entire gain will be taxable in the year of sale. Let’s assume (without considering property improvements or buying or selling costs) that you purchase a rental for $50,000 and then several years later sell it for $300,000. Over the period of time that it was a rental, you took $10,000 in depreciation deductions. Your tax basis in the property at the time of sale would be $40,000 (your cost of $50,000 less the $10,000 taken in depreciation).

Thus, your gain would be $260,000 (the sales price of $300,000 less your tax basis of $40,000). The recaptured depreciation of $10,000 can be taxed as high as 25%, depending on your tax bracket and the balance of the gain ($220,000) is taxed at a maximum of 20%.

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