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
