Selling an investment property can result in a bunch of extra income in a single tax year. Especially if the property has increased in value, finding all of the possible write-offs helps you minimize the amount of the sales price that you must share with Uncle Sam.
The basis is the amount you paid for the property. Your starting basis equals the amount you paid plus any settlement costs. In addition, if you paid real estate taxes that were owed by the seller, those add to your basis. For example, if you purchase an investment property for $150,000 and pay -- without reimbursement -- the $6,000 in real estate taxes owed by the previous owner, your basis would be $156,000.
Adjusting Your Basis
You can adjust your basis upwards by the amount of capital improvements, such as a new plumbing system, and assessments for local improvements, such as sidewalks or sewers. However, you must reduce your basis by depreciation and casualty or theft losses. For example, if your original basis is $156,000, but you've paid $12,000 to replace the roof, your basis would increase to $168,000. If you had taken $10,000 in casualty loss deductions from storm damage, your basis would decrease to $158,000.
If you use a real estate agent to help you sell your investment property, you can deduct the agent's commission and other amounts paid to the agent, such as the cost of advertising the home for sale or open house expenses. For example, if you sold the house for $200,000 but your broker charged you $7,000 in commissions, $193,000 is the final figure.
If you own the investment property as part of an investment group and you are charged an exit fee or a redemption fee, you can also deduct those costs from your selling price. For example, if you sell your interest for $193,000 but you also have to pay an exit fee of $3,000, your amount realized drops down to $190,000.
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