welcome back to our Channel clear Valley
tax my name is Brian Kim I'm a certified
public accountants and today we are here
to talk about the sale of a rental
property so the full equation for
calculating this out is the sales price
minus cost basis will equal your gain
okay so there's three pieces right the
sales price is straightforward the gain
is straightforward it's the cost basis
that trips up everybody or nearly
everybody so we're gonna break this down
for you okay so you have sales price you
have cost basis and you have your game
so the sales price that's a very
straightforward if you sold your
property for 400,000 then your sales
price is 400,000 straightforward there's
no tricks it is what it is it's very
straightforward cost basis okay okay
cost basis here okay these are the
things I'm gonna have to read this one
off okay so cost basis is the purchase
price of the home okay
how much did you purchase the property
for plus the closing costs of when you
purchased the home okay so we'll get
into that plus the closing costs of what
you sold the property
okay well I'm I'm using the word home
and property interchangeably okay so the
closing cost of the home when you sold
the property plus improvements or
additions that you made to the property
and then you subtract the depreciation
that you've claimed over that property's
history you know so you're gonna have to
look at the prior year tax returns or
just look at the accumulated
depreciation balance so we're gonna dive
into all points all those points one by
one okay so the cost basis the first
bullet point that we mentioned was the
purchase price of the home piece of cake
how much did you purchase the property
for you know there's no there's no
tricks there purchase price in the home
okay moving on the closing costs the
closing cost of when you purchased a
property okay those are gonna be title
charges they're gonna be transfer taxes
they're gonna be settlement costs are
gonna be attorneys fees you know they're
going to be on the HUD statements or the
settlement statement of when you
purchased that property if you bought
that property ten years ago you got to
dig up there that document from ten
years ago you know they're they're all
gonna be listed on that statement the
HUD statement or settlement statement so
you need to you need to dig that up
because you know from our experience you
know those are going to be in the you
know ten thousand or more you know it's
it's a really big number you do not want
to miss those so dig that up dig up the
Hudson or Salomon statement from when
you purchase the property okay moving on
to the next bullet point was the same
thing but it's on the sale side of it so
you just closed on the property got it
right so the closing cost of when you
sold a property you know those will be
this those will be the same things you
know the the title charges transfer
taxes settlement cost attorneys fees etc
but additionally you know what you're
not gonna find on the purchase side is
that when you sold it usually you're
gonna have well if you work with a
broker or a realtor you're gonna have
the Commission's and those are gonna be
huge you know generally they're gonna be
large generally they're gonna be you
know anywhere from five to six percent
if they're not or you know you you still
the property yourself you know that's
great you save money but even on the you
might have had to pick the buyer side
Commission so please do not miss that
especially the Commission's that is huge
okay so those are the closing costs of
when you sold the property and what you
bought the property so don't forget
those you need to dig up those
statements on the sale and when you
purchased it okay and then you're gonna
have the improvements or the additions
that you made to the property during the
course of the
properties life so if you you know
upgraded the the home in any way you
know you do not want to forget that
because that's gonna increase your cost
basis which is good which is good for
the tax equation so if you made an
addition or you didn't remember
remodeling so you know you should have
captured that on the Schedule E when you
were filing your taxes for the rental
activities during that year but if you
didn't still please don't forget those
and you know if you did capture those on
your schedule II in the year that it did
occur okay good just don't forget to add
that to your cost basis okay so those
are those are the four additions to the
cost basis to purchase price of the home
closing costs when you bought the home
closing cost when you sold the home and
the additions or improvements that you
made for the home you know so those are
the four cost basis items that will
increase the cost basis which is good
okay because that's gonna reduce your
game now the one thing that you subtract
in the cost basis calculation will be
the depreciation that you've claimed so
for this you need to see what your
accumulated depreciation is accumulated
depreciation is for that property for
that the life of that property because
that's going to subtract and reduce the
cost basis okay so you're gonna have a
sales price minus your cost basis and
that'll give you your game perfect but
you know that's you have your game but
what rates what rates are you gonna use
is that you can't say oh it's gonna be
15 percents you know the federal
long-term capital gains rate no it's not
that simple because you need to take
into consideration depreciation
recapture when you sign the property for
a game okay so before we get there let's
give an example of calculating
the cost basis so you can see it and you
can work with it you know you can work
with me through this to see what your
own eyes how this calculates how it
flows so I'll just read off an example
so in this example let's say you sold
your property for $400,000 okay property
sold for $400,000 now let's figure out
the cost basis let's say you bought the
home you bought the property for us
$300,000 okay closing costs when you
bought the home or $5,000 got it
you made improvements to the home for
$15,000 okay that's gonna increase your
cost basis the closing costs when you
bought the home will increase your cost
basis the improvements that you made to
the home will increase your cost basis -
closing costs when you sold the property
we're let's say $20,000 so that's gonna
increase your cost basis by $20,000 more
okay so let's say in this example the
depreciation that you've claimed on the
life of the property is $50,000 okay so
what is the cost basis now so the cost
basis is the $300,000 that you bought
the home for plus the 5,000 of closing
costs when you bought the home plus
$15,000 of the improvements that you
made plus the $20,000 of the closing
costs when you sold the property minus
the 50,000 of depreciation expenses the
accumulated depreciation that you
claimed or the course the property's
life okay so now you have a cost basis
of 290 thousand dollars you sold the
home you sold the home for four hundred
thousand so that's a game of 110
thousand okay so it's not going to be a
hundred ten thousand dollars of game
time
18% federal income taxes no that's not
how it works okay because you're
ignoring something so crucial which is
the depreciation recapture and the
depreciation recapture has its own rates
so let me just give you the quick back
story so each year on the Schedule E
that's the rent selectivities income and
expenses you are claiming a depreciation
expense okay and that's helping you
you're benefiting you're claiming
depreciation expense you know you don't
get that for free you know it's gonna
come back to bite you and you know you
you you can't do anything about it when
you sell the property that's called
depreciation recapture you get the
benefit as you're renting it out but you
don't get the benefit for free it's kind
of like a tax deferral mechanism where
you get the benefit in those current
years and then it comes back to get you
when you sell the property
you know the appreciation recapture okay
we're not gonna talk about all the tax
tricks that you can do to avoid that you
know like kind exchanges or opportunity
funds we're not gonna talk about this
we're talking about just a straight-up
sale the property you know you want the
funds so there's none of the deferral
mechanisms and you're going to face the
depreciation expense the depreciation
expense recapture okay so the tax in the
game in this example if we're saying
that you have a hundred ten thousand of
gain you have to know what your
accumulated depreciation was right it
was fifty thousand in this example
that's important because the
depreciation recapture rates are twenty
five percent you know much higher than
the 15 percent for long-term capital
gains rates so you will pay the
appreciation recapture rates up to the
extent of how much depreciation you've
claimed on the property so in this
example you've taken fifty thousand of
depreciate
during the course of the property so up
to the extent of $50,000 of gain you
will pay taxes at a rates of 25% on the
first $50,000 of gains the excess the
remaining $60,000 of gains in this
example will get taxed at your long-term
capital gains rates of 15% okay so
that's the difference you know to
clarify let's say the accumulated
depreciation expense was the cumulate
depreciation was 20,000 over the course
of the property and let's let's stick
with the game the total game is 110,000
so in that example you would pay
depreciation recapture rates of 25% on
the first 20,000 and then the remaining
90,000 we get taxed at the 15% rate so
that's why the accumulated depreciation
you have to take that into the
consideration because you're paying at a
different tax rate than your long-term
capital gains rates so you need some you
need to remember that especially if
you're trying to Ballpark you know it's
in the middle of the year your ballpark
what you gain is what your tax liability
is and you want to make an estimated tax
payment so you use the appropriate rate
you need to know that the rate is point
five percent and that might be
substantial if your accumulated
appreciation is substantial you know it
might not be so substantial if you only
rented out your property for one year
two years and the cumulated appreciation
is minimal and in that case if you have
a large game the majority of those games
will be taxed at your long-term capital
gains rates but in the event where
you're renting out for ten years twenty
years or twenty seven and a half years
then that's a situation where probably a
majority of your gains you know it could
be a majority of your gains would be
taxed at twenty twenty-five percent you
know it's a big difference especially if
you're talking about gains on a property
which you know they could be substantial
okay so that is kind of a very in-depth
overview or
about the gain equation for sale a
rental property you know this is not
this is not your beginner or entry-level
stuff for when it comes to the tax
preparation so if you actually could
follow what the heck I was saying during
this video you know kudos to you that's
very impressive you know on your end but
if you have any questions or you need
anything clarified now please leave a
comment or question below I'd be happy
to get back to you so you know please
feel free to take advantage of that so
thanks for tuning in and we look forward
to making more videos thank you so much