What are the tax implications of selling a rental?

May 10, 2000

From:  Stephen W. Houdek
Date:  Tue, 4 Jan 2000

My father is retired, 65 years old, and has rental income from a second house he inherited 10 years ago. If he were to sell this home, what would the tax implications be? Is it taxed as a capital gain? If so, at what rate?

He is in the low tax bracket.



Date:  January 2000

Hello Stephen,

Your father received a new tax basis in the house as of the date of death of the previous owner of the house.

Accumulated depreciation for the house is a special category of gain taxed at a maximum rate of 25%.

Any gain in excess of the accumulated depreciation is a class of income called Section 1231 gain. When there is a net Section 1231 gain for the year of sale and there weren't Section 1231 losses in previous years, the gain is taxed as a long-term capital gain, subject to a maximum tax rate of 20%.

Your father could eliminate the capital gain part by living in the home for two years and converting it to a principal residence.

In either case, get professional help. I've omitted some details in this answer.

Good luck!
Mike Gray

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