What Income to Report from your Rental Property (capital gains when you sell your property)

There comes a time when you may want to sell your rental property for any number of reasons, however it most important to note that you may be subject to taxable income on the gain of the sale or loss. Of course there must be “material participation” in all property involved as well as certain “passive activity” guidelines. In this section we are assuming that the sale is a normal sale and not a casualty loss, theft, or any other transaction outside the normal course of a business sale.

The 2 most important items to note here are:

  • Sale of property that you have a personal use time included and it is not a home or dwelling.
  • Determine whether you have a Long term or Short term capital gain “(Holding Period)”
There are several forms that need to be involved in this transaction and they include:
  • IRS form 1040 Schedule D capital Gains and Loss
  • IRS form 4797 Sales of Business Property
  • IRS form 8949 Sales and Other Dispositions of Capital Assets

The Informational returns such as Form 1099 B, or S, usually for reporting a capital gain by the real estate reporting person.

Some of these forms may not be necessary depending upon the type of sale and the position the seller had in the property sold. So we will keep it simple and focus on sales that are most common.

Let’s look at the first subject in which you are selling rental property that you have a personal use stake involved. You need to report the gain on a sale or exchange of this type of property on Form 8949 and 1040 Schedule D. Please note that losses on this type of sale are not deductible. Also if you had a loss and you received a 1099 S, report this on the 8949 and Schedule D even though it is not deductible.

Now let’s look at the “holding period” in which you will determine whether you have a Long term or Short term capital gain. The period of time less than 1 year is considered “short term” and any time after that is “long term”. Please note also that with Installment Sales the same applies if the payments are made within the current tax year then it is short term.

On the Form 8949, here is a guideline to use on completing the form:

Depreciable residential rental property:            If held for less than 1 year:                 Held for more than 1 year:

1. Sold or exchanged at a gain                          Part II                                                              Part III (1250)
2. Sold or exchanged at a loss                          Part II                                                               Part I

 

Finally, there may also need to be a “recapture” of depreciation, investment credits, rebates, and certain bonuses obtained in the purchase of the property. The nature of the sale will determine these factors.

For more detailed information, please review IRS Publication 527, 537, 544 and 550.

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